Forex Flash: Italian uncertainty to foster heightened risk – RBS

The Italian election result appears to have produced no clear winner across both houses of parliament, and Monti’s centrist coalition, most supportive of the current austerity path, polled a distant fourth, making it largely irrelevant. According to the Greg Gibbs, an FX Trading Specialist at RBS, “It thus may be ungovernable and creates a sudden descent back into uncertainty over the future of the economic policy direction in Italy and the willingness of the ECB to use its OMT to support the Italian bond market.”

Recall that before the ECB can use its OMT policy the recipient government needs to have signed up to a program of economic and fiscal reform with its Eurozone partners. Italy has not and now may not have a government that has the authority to do so. As such it does not appear that the ECB can provide support to its bonds. Monti has been politicized and polled so poorly that simply handing the reins back to a technocrat government that has any significant public standing and authority looks very difficult.

The chances of the major parties forming workable coalition look low. The latest press is that Bersani’s Democratic Party may talk with the Grillo’s Five Star Movement on whether it would like to offer its support to the Democratic government to allow them to work together in government. This seems like an unlikely coalition, with Grillo campaigning hard as an anti-establishment alternative. A grand coalition with Berlusconi’s People of Liberty party lacks credibility. “This suggests we may be heading back to the polls that may or may not deliver any different outcome.” Gibbs predicts.