Antonio Masiello | News Getty Images | Getty Images Italy’s Mario Draghi on Wednesday is set to tell lawmakers whether or not he will stay on as prime minister – which could create further market volatility ahead of a crucial European Central Bank meeting later this week. Political instability returned to Rome last week when one of the coalition parties decided to oppose a bill in Parliament. The move prompted Draghi, in power from February 2021, to announce his resignation. However, Italian President Sergio Mattarella rejected Draghi’s resignation and asked him to hold further parliamentary negotiations. Draghi is now due to address MPs on the outcome of his talks on Wednesday morning, but it is unclear whether he will remain in office. An official working for the Italian government, who did not want to be named because of the sensitivity of the matter, told CNBC that “it is more likely that he will confirm his resignation and we will go to an election, but we have to see if all these efforts to convince him to change his mind they will be successful.” Hundreds of mayors signed an open letter over the weekend calling for Draghi to stay. Union leaders and industrialists also rallied to call on Draghi to stay in power. Meanwhile, thousands of citizens also signed an online petition asking Draghi to stay, according to the AP. Matteo Renzi, the leader of the Italia Viva political party and a former prime minister, told CNBC’s “Street Signs Europe” on Tuesday that “his personal betting company is pointing to Draghi retaining his role. [by] 75%”. He added that he would like Draghi to remain in power until May 2023, just before parliamentary elections. Draghi has brought political stability to Italy over the past 15 months, which has been critical to receiving nearly 200 billion euros ($205 billion) in European pandemic recovery funds. His leadership has also been important in the context of Russia’s invasion of Ukraine, with the former ECB chief playing a role in EU sanctions and supporting Italian households facing higher consumer prices. Italian bonds are likely to remain under pressure until we have clarity on the political front. Frederick Ducrozet Head of Macro Research, Pictet Wealth Management However, this stability could end if Draghi leaves, as there is no clear majority in Parliament for either political party if snap elections are held. Political uncertainty is particularly problematic at a time when inflation continues to move higher, Russian gas flows are falling and the ECB is looking to raise interest rates. “Pressure to create the conditions that will allow Draghi to stay in power is increasing, making this the most likely scenario,” Lorenzo Codogno, chief economist at Macro Advisors, said in a note on Monday. Regardless of the outcome, markets will be watching closely. The yield on Italy’s 10-year bond traded 0.3 percentage points higher on Tuesday at 3.3960%. The same yield hit 3.394% on Friday after Draghi’s decision to step down. Investors are worried about Italy’s outlook in the wake of the latest political turmoil. At the start of the year, the yield on the 10-year Italian bond was below the 1% mark. It’s not just the latest political picture that heightens concerns. The European Central Bank has plans to raise interest rates, which could be a problem for Rome given the country’s extreme public debt pile. “Italian BTP is likely to remain under pressure until we have clarity on the political front, which remains as fragmented and uncertain as ever,” Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said in a note on Friday. “Draghi could stay after winning another vote of confidence, but ultimately he will be out of the equation anyway,” he added. Italy is due to return to the polls in June 2023, unless snap elections are held before then, and Draghi, a technocrat, is unlikely to run. Given the fragility in the halls of the Italian parliament, investors argue that volatility could kick in down the road if Draghi decides to stay a little longer, but he will eventually return to Rome. This is also important for Italy’s economic and financial future. The ECB is expected to present on Thursday a new tool to tackle the risks of fragmentation in the euro area. The idea is to calm markets that have been jittery over the large piles of public debt across the 19-member region. However, Italy can only benefit from this new tool if it complies with strict reform targets. The ECB “is likely to unanimously agree that a necessary condition for a member state to be eligible for ECB support will be the government’s compliance with the European reform agenda,” Ducrozet said.
