Italy holds elections tomorrow and many observers fear a muddled outcome

Bersani for President signs

Last minute plea from Ital­ian voters.

Italy’s nation’s cur­rent leader, Mario Mon­ti, the dar­ling of Europe’s gov­ern­ing class, is run­ning fourth among the cur­rent slate of can­di­dates. He trails come­di­an Beppe Gril­lo, whose obscen­i­ty-laced rants are draw­ing big crowds and may pro­pel him beyond his cur­rent third place posi­tion. Pier Lui­gi Bersani, the Cen­ter-Left can­di­date, leads the pack, but he’s being pur­sued hard by the nev­er-bor­ing Sil­vio Berlus­coni. Mr. B is try­ing to reclaim the office from which he was roust­ed 15 months ago in favor of Mario Mon­ti, who was appoint­ed to head a “tech­ni­cal government.”

The gen­er­al think­ing is that Bersani will hold on to win a plu­ral­i­ty of votes and com­bine forces with Mon­ti to form a new gov­ern­ment. But while that is still thought to be the most like­ly out­come, it is far from a sure thing. Poll data are not fresh, since Ital­ian law pro­hibits polls from being pub­lished close to the elec­tion, and any late move­ment by vot­ers is thought to dis­fa­vor the front-run­ner Bersani and the dour Mon­ti, to the ben­e­fit of more flam­boy­ant can­di­dates like Gril­lo and Berlusconi.

That could lead to an out­come in which it is dif­fi­cult or even impos­si­ble for any of the can­di­dates to form a gov­ern­ment, as hap­pened in Greece in 2011, leav­ing a coun­try already beset with high unem­ploy­ment and a shrink­ing econ­o­my in polit­i­cal chaos.

Despite pro­found ide­o­log­i­cal dif­fer­ences among the can­di­dates, they all seem to agree that aus­ter­i­ty mea­sures under­tak­en by the Mon­ti gov­ern­ment should be rolled back. When Mon­ti took office, Ital­ian bond rates were soar­ing and threat­en­ing to push Italy into default. Mon­ti calmed the bond mar­kets with a pro­gram of high­er tax­es and low­er social spending.

That pro­gram is large­ly viewed as a suc­cess by every­one but Ital­ian vot­ers. They are angry. Under Monti’s lead­er­ship, tax­es and unem­ploy­ment soared, pen­sion ben­e­fits were delayed and reduced, and the econ­o­my con­tract­ed. All of the can­di­dates are now run­ning against the Mon­ti agen­da. Mon­ti him­self promis­es to roll back some of the tax­es that his gov­ern­ment insti­tut­ed or raised. But that is only net­ting him an esti­mat­ed 15 per­cent of the vote, as his oppo­nents say they would go much further.

With fis­cal rec­ti­tude on the ropes, a mud­dled elec­tion result increas­ing­ly like­ly, the ECB’s announce­ment this week that it holds a mas­sive port­fo­lio of Ital­ian gov­ern­ment debt on its bal­ance sheet, and the EU’s assess­ment that Italy’s econ­o­my con­tin­ues to con­tract (along with that of the rest of the Euro­zone), you would expect investors to be spooked.

You would be wrong.

On the last trad­ing day before tomorrow’s elec­tion, the Ital­ian stock index rose 1.4 per­cent and yields on Ital­ian 10-year notes dropped by more than 4 basis points. 

I’m not sure why this bar­rage of bad news leads investors to bet on Italy, but the fact that they are able to offload Ital­ian bonds onto the ECB’s bal­ance sheet seems the most plau­si­ble fac­tor. Investors, large­ly pri­vate Ital­ian banks, are will­ing to buy the Ital­ian government’s debt, so long as they know that the ECB will take it off their hands.

The ECB for the first time this week dis­closed just how much Ital­ian gov­ern­ment debt it has tak­en on: 102.8 bil­lion euro ($135.6 bil­lion) , near­ly half the total amount the ECB has print­ed to bail out finan­cial­ly trou­bled Euro­pean gov­ern­ments and more than twice the amount issued to the sec­ond-place ben­e­fi­cia­ry (Spain, 44 bil­lion euro).

This is a stun­ning vote of no-con­fi­dence in Ital­ian debt. Under its mas­sive cash-for-trash pro­gram, the ECB prints euro and exchanges them for Ital­ian bonds that pri­vate investors pur­chased. Italy can finance its debt at afford­able rates large­ly because investors know that they dump the bonds onto the ECB. This allows the Ital­ian gov­ern­ment to con­tin­ue bor­row­ing and rolling over cur­rent debt at rea­son­able rates despite a shrink­ing econ­o­my and the grow­ing poten­tial for polit­i­cal cri­sis. 

Per­haps a gov­ern­ment no longer needs eco­nom­ic growth and polit­i­cal sta­bil­i­ty to live beyond its means. All it takes is a cen­tral bank will­ing to for­give all sins.