New PM Renzi Faces Uphill Battle

BMI View: We view positively the urgent reform agenda of incoming Italian Prime Minister Matteo Renzi. However, he will struggle to gain sufficient support for his policy goals from a fractious coalition and divided parliament.

Matteo Renzi, the mayor of Florence and secretary of the ruling centre-left Democratic Party (PD), is set to become Italy's third prime minister in just over a year following the resignation of Enrico Letta on February 14. In contrast to previous bouts of political instability, financial markets have reacted positively to the news, and given Renzi's centrist political stance and sense of urgency to invigorate Italy's structural reform drive, we share this upbeat sentiment. However, by taking over Letta's fractured coalition with no guarantee of sufficient support for his policy goals, we believe Renzi is taking a major risk of damaging his credibility and deflating the public enthusiasm that has underpinned his rapid rise to political prominence. This could have negative implications for the long-term viability of his reform agenda.

After winning the PD party leadership in a landslide election in December 2013, Renzi steadily ramped up pressure and criticism on Letta for failure to expedite key reforms, culminating in the latter's resignation. Renzi's assumption of the premiership now places him in a vulnerable position, as he is viewed with considerable scepticism by coalition partner the New Centre-Right (NCD), as well as by the left wing of his own party. Although Renzi's popular appeal has largely stemmed from his vocal desire to flush out Italy's old political guard and his criticism of the gridlock that has characterised the legislative process, he may very well fall victim to these forces if he is undermined by the fractious and contentious nature of his coalition.

Yields Holding At Pre-Crisis Levels
Italy - Generic 10-Year Government Bond Yield, %

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This article is tagged to:
Sector: Country Risk
Geography: Italy

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