Italy: Draghi's Departure Would Delay Important Reforms and EU Money

Prime Minister Mario Draghi's decision to resign, if confirmed today, will pave the way for a period of high political uncertainty in Italy. The implications of this could weigh on the speed of the reform agenda which if not implemented could bring into question Italy's commitment to European Union (EU) integration. Notably, important reforms could be put on hold or become less ambitious. First, there would be delays until a new government is formed and thereafter elections themselves could herald a victory for a centre-right coalition led by the eurosceptic party Brothers of Italy (Fratelli d'Italia, FdI), which could be perceived as less keen on EU integration triggering an increase in sovereign yields. In this commentary DBRS Morningstar sheds some light on the likely consequences of Draghi's departure especially in the near term, with particular focus on Italy's reform agenda. DBRS Morningstar views Italy's investment and reform agenda as important for Italy's sovereign rating prospects, currently BBB (high) with a Stable trend.

-- In DBRS Morningstar's view, Draghi's departure paves the way for a period of high political uncertainty.
-- An interim government to end the legislature or snap elections are both possible. While in the first case some progress with legislation is likely, in the second case reforms will likely be put on hold waiting for the new government formation.
-- In DBRS Morningstar's view, Italy is familiar with government instability and the reform agenda is not in complete danger.

“There is high uncertainty regarding Draghi’s decision today and it is unclear if his departure leads to snap elections,“ said Carlo Capuano, Vice President Sovereign Ratings. “In any case, the strength of the institutions does not depend on a single name and political parties are aware that passing reforms is the only way to obtain the full benefits of EU funding.”