ITALY view – Draghi, Economy, Markets

by K P
Reading Time: 6 minutes

* this is not a trade recommendation and for educational purpose only. please do your own research.

Italy’s Government 67.0

To be honest, I didn’t see Draghi’s invitation to form a new government coming… and yet, with an extra portion hindsight, silly me.

No snap election, a Conti III not possible, so Draghi was just handed the top political job. Just like that.

The ultimate pro-EURO global banker.

President Mattarella “in the current emergency situation the country cannot afford a snap election and the high profile non-political national unity government was needed to tackle the multi-faceted challenges of a vaccination campaign, the relationship with Europe on the Next Gen EU plan and managing the upcoming end to the redundancy ban.”

Just as Italy likes fashion, having a new PM/Govt every (average 413days) is also fashion ? Since 1946, the average days spend in office is 413, so the mandate looks short-lived, although the average days since 2000 improved to 643. Let’s see how long “Super-Mario” lasts. Hopefully more longevity and stability.

Draghi’s impressive CV

He has been on the world stage and his network is vast, no question. From politicians to bankers to the corporate world. And apparently “his pragmatism and non-ideologic approach could help him strike the necessary balance within the cross-parliamentary majority” to quote ING economics.

  • 1981 – 1994 Professor of Political Science , University of Florence
  • 1983 – 1984 Counsellor of the Minister of Treasury, Italy
  • 1984 – 1990 Italian Executive Director World Bank
  • 1991 – 2001 Director General of the Treasury, Italy
  • 2001 – 2002 Fellow of the Institute of Politics, Harvard
  • 2002 – 2005 Vice Chairman, MD Goldman Sachs
  • 2005 – 2011 Governor Bank of Italy, Chairman FSB 2009-11
  • 2011 – 2019 President ECB

Business view

  • He revised the Italian corporate and financial legislation and drafted the law that governs still today
  • He was a main PROponent of privatisations of many state-owned companies in the 1990s
  • 2009 he aimed to promote financial stability, improve functioning of markets, reduce systemic risk
  • He never raised the ECB benchmark rate
  • 2012 He initiated LTRO, stepped up bond purchase programs 
  • 2012 “Whatever it takes” to preserve the EURO
  • 2016 Thought “helicopter money” concept was interesting

With the strong support from the ECB, the not ratified large “next Generation EU” package” of the new stablished EU Recovery Fund, the market – at least for now – welcomed the decision him as the next Prime Minister. 



How does Italy’s economy look like ?

After -5.5% Q1’20, -13% Q2’20 the strong rebound of +16% Q3’20, but another -2% Q4’20. Risk of double dip recession. Lockdown 2.0 – rightly or wrongly can always be debated – shows its effects (seasonal or not): cases coming down, mobility should go up.

Economic Sentiment

Italian’s business confidence – while v-shaped recovered – recently had been mixed as manufacturing and construction sector remain stronger, whereas Services lags, Retail weak and employment confidence overall falling again.

ESI improved to 90.2, Industrial new orders 6M high, Services new orders 4M high, employment confidence overall dropped to 6M low 89.6. Markit M PMI improved from 52.8 to 55.1, 12M high, S PMI improved from 39.7 to 44.7.

Lockdown 1.0 and 2.0 and the aftermaths:

New Orders – Manufacturing/Services/Construction:

Employment – Manufacturing/Services/Retail:

Prices – Manufacturing/Services/Construction:

Retail Prices vs CPI and vs IT10Y yields

And here is what business new orders, employment and price surveys eventually translate into: inflation yes or no ? CPI showed in fact DE-flation, but IMHO should be short lived. Business is re-opening, production increases, base effects of commodities coming into play, prices should go higher.

And despite the great ECB effort to be supportive of buying BTPs and Corp debt, what really is a “fair value” of Italian bonds ? The distortion is so large now, it’s a joke.

The only argument for being long here is a conversion trade vs even more distorted ES or PT bonds.

But taking potential inflation around the corner and the discrepancy, IMHO at this levels BTPs are rich.

Damocles sword – Funding

Biggest problem is or was (or will be) the enormous funding costs, because Italy can’t devalue their currency like in the old days, to be more competitive, so it needs all the external help it can get, otherwise BBB rated govvies would plunge into the abyss.

One wake up call was 2018, when 10Y went from 1.50 to 3.50 which created a massive RiskOFF situation. The ECB stepped up and brought the rates down back to 1%.

When Italy – as the first nation in Europe – took the pain and ordered the national lockdown – BTPs sold off again, 2Y +125bp, 10Y +160bp, and only stopped with the global central banks and fiscal rescue operation. (blue line). Since then, yet another strong rally.

But now, are BTPs at 0.5% “cheap” because Spain traded 0.12% and Portugal 0.06% as Draghi steps in ?

Meanwhile US10Y already moved from 0.50% to 1.15% +65bp, Canada +50bp to 1%, Australia +50bp to 1.20% , China 10Y rose 70bp to 3.22%. NZ10 moved +25bp just this week.

If Super Mario was invited to fix all the problems, it surely should ultimately lead to higher growth, slowly rising inflation, higher employment = REFLATION.

Conversion vs reflation. Quite a balancing act.


The Super Mario Effect this week


Well, the very short term impact on the news was applauded by the market. Bonds “jumped”, yields fell. BTPs short theme got burned with a Mario surprise.


Really liked it too – accompanied by the global stock market rally this week anyway – large caps, mid caps, small caps all RiskON all the way.

…Oh, One More Thing…

Best ECB presser ever : )

*  ignore my grammar and articulation, it’s not my mother tongue, just read between the lines and connect the dots 🙂

Das war’s , vielen Dank und good luck, Kai


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