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“Incumbent President Mattarella was re-elected as Italy’s head of state with a large majority, settling a political stalemate and enabling a continuation of the current government under prime minister Mario Draghi. This is a positive outcome for Italy and market risk in the short term, and indeed, BTP spreads have tightened somewhat today. Over the medium term, however, Mattarella’s age (81) and the forthcoming parliamentary elections (2023H1) cast a shadow – more than if a younger candidate (incl. Draghi) had been chosen for the post. Put differently, we view Mattarella’s confirmation also as an expression of hope from the parties opposing Draghi that they will, after winning the forthcoming elections, potentially be in a position to elect the next President.
 
The bungled electoral process also shone a light on very substantial disagreements within the center-right and center-left coalitions and even within some of the larger parties. In many ways, this presidential election was the opening shot for the parliamentary elections next year, with a significant amount of political upheaval likely between now and then. We expect the reform momentum to stall after the summer with parties having to rebuild their profile rather than supporting the politically difficult reforms possible under the technocratic “scapegoat” government headed by Draghi. With the ECB reducing its asset purchases gradually, we expect spreads of Italian government bonds to drift wider again once the immediate excitement is gone.”