Renzi Meets Party Leaders to Form Italy Government

Italy’s designated Prime Minister Matteo Renzi started talks with party leaders today in a bid to win their support for his political program.

The 39-year-old Democratic Party leader, who received a mandate from President Giorgio Napolitano yesterday to form a government, pledged to overhaul Italy’s labor market, modify the tax code and change the country’s election law in the first 100 days of his administration.

While Renzi may have a better chance of success than Premier Enrico Letta in rewriting the electoral code, simplifying labor laws “will be challenging, as he still faces a divided parliament where his party does not have a majority in the Senate,” Alberto Gallo, head of macro credit research at Royal Bank of Scotland Group Plc, wrote in a research note yesterday.

Renzi must assemble a coalition that can win confidence votes in both houses of Parliament. While his Democratic Party, known as the PD, and its allies have a majority in the lower house, the support of moderates and conservative parties will be crucial for Renzi to secure the Senate, where the PD has just 108 of 320 seats. Today’s consultations will continue until at least 7 p.m., according to the Chamber of Deputies website.

‘Too Leftist’

In particular, Renzi may have to win over the 31 senators elected with the New Center-Right party of Angelino Alfano, who broke with former Premier Silvio Berlusconi’s conservative People of Liberty party last year and became a junior partner in Letta’s coalition.

While Alfano hasn’t ruled out supporting a Renzi government, he has made clear that he’d refuse to support an administration that was “too leftist.”

Renzi, who would be the youngest prime minister in Italian history, said yesterday that discussions to form a stable government that can survive until the end of the legislature in 2018 may take “several days.”

Market reaction to his nomination has been positive so far, with Italian 10-year bond yields dropping to the lowest level in eight years yesterday. The extra yield over similar-maturity German bunds contracted eight basis points to 193 basis points yesterday after shrinking to 191 basis points, the narrowest since July 2011. The spread was little changed at 194 basis points at 9:30 a.m. Rome time.

On Feb. 14, the day Letta resigned, Italy’s credit rating outlook was raised to stable from negative by Moody’s Investors Service, which cited the government’s financial strength and reduction of risks from contingent liabilities.

Room for Maneuver

“Renzi is perceived to be committed to implementing a speedy reform program and he has often shown himself ready to make quick decisions,” Annalisa Piazza, senior fixed-income strategist at Newedge Group in London, said in an e-mailed note. A sell-off of Italian government bonds in the near term can be ruled out, Piazza said.

Wolfango Piccoli, managing director at Teneo Intelligence in London, warned that divisions within Renzi’s party, as well as budget constraints and a slim majority in the Senate may hamper his 100-day agenda.

“Expectations of sweeping reforms should not be overstated,” Piccoli wrote in a research note yesterday.

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