Photographer: Alessia Pierdomenico/Bloomberg

What You Need to Know on Political Risk in Italy: QuickTake Q&A

Italy’s all-too-familiar postwar brew of government dysfunction, economic stagnation and toxic debt has investors worried about Europe again, even as things seem to be settling in Greece, Ireland, Spain and Portugal. Italy’s next elections are due in early 2018 but could be moved up to this year. They will test, among other stress points, the country’s ambivalent relationship with the euro, its towering debt and a troubled banking system still trying to dispose of decade-old toxic holdings.

1. How likely are early elections?

Much less likely than they were a few months ago. President Sergio Mattarella, whose role it is to dissolve parliament, insists on electoral reform to iron out differences between the lower house and the Senate before a new vote is held.

2. When are elections due?

By late May, and they could take place in April or March. Mattarella told Bloomberg TV in June that Italy wasn’t likely to vote this year, adding that “the foreseeable date is between February and the start of spring.”

3. Who wants early elections?

A key backer of a 2017 vote is Matteo Renzi, the former prime minister and current head of the ruling Democratic Party (PD), who is eager to return to power but may see his chances dimmed if the current government, led by his handpicked successor, continues to struggle. Opposition parties, meantime, see their popularity as being ascendant and are ready to test that at the ballot box.

4. What’s wrong with the current government?

With thorny issues on the horizon, Prime Minister Paolo Gentiloni, Renzi’s successor, has been weakened by a one-two political punch. First, a leftist faction abandoned the party and set up a new movement. Then the PD’s centrist coalition partner, Popular Alternative, refused to support a bill giving citizenship to immigrants’ children born in Italy. That refusal forced Gentiloni to postpone a vote on the measure.

5. What hard issues are coming?

First is a possibly painful budget law for 2018. The budget, which the government has to present to parliament by Sept. 27 and to European counterparts by mid-October, is supposed to lower the structural deficit by 0.3 percent. Gentiloni, who has a razor-thin majority, is also overseeing state intervention to help Banca Monte dei Paschi di Siena SpA, Italy’s oldest bank, as well as Banca Popolare di Vicenza SpA and Veneto Banca SpA

6. How serious a crisis is Italy’s debt?

At about 133 percent of gross domestic product, Italy’s debt is second-highest in the euro area, after Greece. The European Commission called the debt "a major source of vulnerability" for Italy and has been overseeing the country’s pledges to reduce spending. The worry for many investors is that Italy is the country that could sink the euro if populists win the next election. A win by the anti-establishment and anti-euro Five Star Movement, and a possible post-election pact with the anti-euro Northern League, would raise doubts over the sustainability of Italy’s debt.

7. How likely is it that Italy would abandon the euro?

Five Star’s pledge to hold an advisory referendum on euro membership taps into voters blaming Brussels at least in part for the sluggish economy. But pulling Italy out of the euro would require cross-party political backing as well as a tortuous legislative process. A constitutional amendment would be necessary even before calling a referendum.

8. How unhealthy is Italy’s banking system?

Government measures on Monte Paschi and the two Veneto banks have defused a big source of financial and political stress in the euro zone for the last two years. But the underlying problems remain, including cronyism with many lenders too entwined with politicians, unions and foundations of all shapes and sizes.

9. How are markets taking it all?

After a multi-party deal on a new electoral system unraveled in June, making early elections unlikely, Italian 10-year bonds rallied. Markets are concerned not just by the prospect of a hung parliament, but also by Five Star’s promise of a referendum on Italy’s membership of the euro area. Add to that worries about how Italy could suffer from an end to the European Central Bank’s quantitative easing program.

10. What do the opinion polls say?

Three blocs are virtually tied in opinion polls: the ruling PD, Five Star and the center-right including the Forza Italia party of ex-premier Silvio Berlusconi, which made a comeback in mayoral elections on June 25.

11. So who is likely to rule Italy next?

If Five Star comes out on top, Mattarella could give its candidate -- possible Luigi Di Maio, 31, the deputy-speaker of the lower house -- an exploratory mandate to try to form a government. But potential allies have yet to step forward, so one possible scenario is a return of Renzi as premier, allied with Berlusconi as in the past. Berlusconi has been blowing hot and cold on a new pact with Renzi, and is locked in a struggle for leadership of the center-right with Matteo Salvini, head of the Northern League.

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