MILAN Reuters -- Giorgia Meloni is poised to become Italy's first female prime minister since World War Two after leading a conservative alliance to victory at Sunday's election.
We expect a somewhat muted market reaction in terms of BTPs credit spread in the short term, as the election outcome was broadly in line with expectations. Some short covering is possible because investors entered the election moderately short BTPs and the risk scenario of a landslide victory by the right is priced out. We expect the 10 year BTP-Bund spread to trade close to 250 basis points by the end of the year. We expect the spread of the BTP-Bund to settle around 230 -- 250 basis points as we wait for the market to assess the composition of the government and budget law unless there is a change in tone from the new government or a worsening of the macro environment.
The debt GDP ratio is under control and higher tax revenues are offset by higher borrowing costs and higher pension spending, making it more likely that the next government will last longer than recent ones, according to a clear-cut victory for one coalition. It will speed up the appointment of the new government, probably before the end of October. Meloni's first decision will be the appointment of the finance minister, with a pro-Europe, fiscally-cautious personality looking a likely choice for now. We do not expect an immediate push for fiscal relaxation, but we do see risks that the right's policy agenda will clash with EU objectives over the medium term. The role of Forza Italia may be crucial for the centre-right coalition and may provide some guarantees on international alliances and the stance towards Europe.
The PD weakened significantly, while the Five Star Movement scored well relative to opinion polls. No major surprise, despite some minor but important shifts. The first steps of the coalition will be crucial to see whether the reassuring signals are confirmed. There are no big surprises when many questions are unaddressed. I think a relatively small impact is possible, considering that the League, the party with the least pro-European stance, seems to have come out weak. The market seems to be oriented more towards macroeconomic issues at the moment. If there is a penalisation of Italian assets, it could be due to the elections but Italy is a country with worrying public finances, regardless of who is in government. The market knew this was going to end and will remain focused on economic growth, monetary policy tightening and public finances at this stage, which remains a slippery slope for Italy.