Safe from ‘Frexit’ but is Italy Next?

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You can almost hear the huge Eurozone sigh of relief as the possibilities of Frexit seem to be diminishing.  The reason is of course, the predicted outcome of the French Presidential elections with most polls suggesting Emmanuel Macron is almost certain to win.  Of course it would be foolish to completely rule out Marine Le Pen, it wouldn’t take much to swing opinion towards the anti-euro party.  Many French voters dislike both candidates which is normally a recipe for a shock.

The next big Euro worry is likely to be from Italy where anti-Euro sentiment is much stronger that France.  Italy has also suffered more than most in the recent financial storms, look at the performance of the various Euro-bonds and you’ll find that Italy’s are among the very worst performing out of all the Eurozone countries.

Take for example an Italian 10 year old bond yield and compare it with a German equivalent and you’ll see a huge spread in the relative values. The Italian bond is rated significantly lower in value than the German ones which represent the political and economic risk the country faces.

This situation is made worse by the potential result in the forthcoming Italian election.  Dubbed by many to be the most dangerous event in Europe, the markets are scared that Italy could vote to leave the Eurozone.  The ant-Euro party, 5-Star are now the highest rated party in Italian opinion polls.  You can see the sort of populist support by merely watching Italian TV for a few hours, try the method in this post entitled – RAI Streaming esturo for a cross section.

They are not alone in Italy many of the other Eurosceptic parties are also doing well which doesn’t bode well if any referendum was help.  It is widely believed that if there was an election in Italy now – the 5 Star party would almost certainly win.

Would this create the ‘QuItaly’ situation that European leaders dread is difficult to guess?  There is no doubt that political populism is on the rise in many European countries and Italy is simply one of many.  There is also the feeling that the Italians are much less pro-Euro than the French.

Even without this actually happening, the political and financial damage of uncertainty is bound to effect the markets.  Italian debt is being downgraded which further decreases the value of Government bonds.  The ultimate effect is that the huge Italian debt becomes more and more expensive to service.

John Francisco


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