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Jul 15 - 02:55 PM

EUR: Italy Political Drama: Market Implications Of Draghi Leaving Would Be Non-Negligible - ING

By eFXdata  —  Jul 15 - 01:30 PM

ING Research discusses the potential implication of Italy political developments on the markets.

"Adding to the eurozone’s recent woes has been a sudden return of Italian political risk. We discuss four scenarios for the country’s political crisis, along with the expected impact on BTPs and the euro. In two of these scenarios, Mario Draghi leaves the political picture – either by being replaced as Prime Minister or if early elections are announced. For now, the President of the Republic has asked Draghi to work on a new stable majority, and his staying as PM appears to be a slightly more likely scenario despite a quite volatile situation. He faces a new confidence vote on Wednesday," ING notes. 

"The market implications of Draghi leaving would be non-negligible. Italian sovereign spreads have embedded some sort of “Draghi put”, and are surely at risk – especially in the event of snap elections – of widening significantly and calling for another (far from granted) intervention by the ECB. No ECB protection could see the 10-year BTP-Bund spread widen to above 250bp levels. In FX, EUR/CHF has the strongest correlation with sovereign spreads, and we could see further pressure on the pair," ING adds. 

Source:
ING Research/Market Commentary

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