Luigi Di Maio of the 5-Star Movement.
  • Italy's political crisis has calmed somewhat since it's rapid escalation at the beginning of the week.
  • The prospect of a coalition government between the Five Star Movement and the Lega Nord is seemingly back on the table.
  • Markets have been calmed by these developments, which are seen as a positive.

Italy has been on everyone's minds this week.

The country held an inconclusive election at the start of March and various parties have struggled to form a coalition government since then. Rumblings about the developing political crisis in Italy started to rear their head over the weekend, with suggestions that two deeply anti-eurozone parties could form a government.

The crisis escalated on Tuesday when markets around the world sold off aggressively. Investors feared that what was happening in Italy could ultimately lead to the demise of the eurozone.

In the last two or so days, however, market panic has died down somewhat, and asset prices have stabilized in the absence of any major new bad news. Attention has shifted away from Italy and toward President Trump's threat of a trade war with Europe.

But Italy hasn't solved its problems overnight. Here's a summary of what's going on in Italy, where the political situation is developing rapidly.

New elections?

The biggest shift since Tuesday is that a fresh general election in Italy is looking less likely.

Another vote — following elections held on March 4 — seemed a sure thing at the start of the week as President Sergio Mattarella attempted to install a technocratic government.

That government would have struggled to find support in the Chamber of Deputies (Italy's lower house). As a result, it was difficult to see how the government could function. Carlo Cottarelli, the former International Monetary Fund official chosen by President Mattarella to head this government, would likely have stepped down if he'd failed to gain parliamentary approval, then stayed in place as a caretaker until a fresh election.

This plan now seems unlikely, as the Five Star Movement and the Lega Nord, the two biggest parties in the Chamber of Deputies, have rekindled their attempts to form a coalition government with a majority in the chamber.

After the election in March, Five Star emerged as the biggest party but fell well short of being able to govern alone. Six weeks of talks with various parties followed until eventually late last week it looked as though a government would be formed by Five Star in coalition with the Lega Nord, party led by Matteo Salvini.

The League, as the party is often known, previously had ties to Silvio Berlusconi's Forza Italia party, but it moved toward Five Star when an opportunity to govern presented itself.

Before a coalition could crystallize, President Mattarella — who must approve every major position in the government — rejected the two parties' nomination for finance minister.

The coalition had put forward Paolo Savona, a highly eurosceptic economist and former banker who was a minister of trade and industry in the 1990s.

Savona has frequently advocated that Italy leave the euro, describing the single currency in a recent book as a "German cage." He has been highly critical of Germany in particular, saying in the book: "Germany didn't change its idea on its role in Europe after the end of Nazism, even if it abandoned the idea of imposing itself militarily."

He also claims that Italy's decision to join the euro back in the 1990s has "halved Italians' purchasing power."

Savona's euroscepticism was enough for Mattarella to reject his appointment and the coalition unraveled as a result.

Now, however, Luigi Di Maio, Five Star's leader, and the League's Salvini are set to resume talks. They are believed to be attempting to find a fresh candidate for finance minister, hoping this will allow them to form a government.

"Let's find someone of the same calibre as Savona, who would still remain in the government in another ministry," Di Maio said on Facebook after meeting with President Mattarella.

According to a report from Reuters, which cites Mattarella's staff, the president has "welcomed" Di Maio's renewed attempts to try to form a government.

Salvini cancelled a rally in Lombardy on Thursday so that he could travel to Rome for talks. But Salvini is believed to favour an early election over a coalition, most likely because of the Lega Nord's surging popularity in the polls. Polls show the party on about 27%, up from around 22% at the time of the March election.

It has been reported that Di Maio and Salvini are set for talks on Thursday afternoon.

Markets have calmed

Whether or not Five Star and the League can find a suitable candidate for finance minister remains to be seen, but the renewed talks have given stock and bond markets something of a boost.

Italian government bonds — known as BTPs — were hammered earlier in the week by the possibility of a new election and the possibility of a so-called Italexit, but have calmed significantly in the last two days.

Bonds are rallying sharply on Thursday, with the yield on the two-year BTP falling more than 60% from it's highest level on Tuesday to a yield of around 0.98%. Bond yields move inversely to prices, so when prices increase, yields fall.

Stock markets around the world also nosedived at the start of the week but are rallying on Thursday as the prospect of Italy leaving the eurozone appears to recede. By Thursday afternoon, the JSE's all share index was up more than a percent to 56,228 points. The rand was stronger at R12.57 a dollar.

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