Markets reacted calmly to the news that a far-right coalition led by Brothers of Italy had won the Italian election, with traders relieved that a low turnout and lack of a landslide reduced the chances of radical action.
The euro EURUSD was not changed much, the Milan stock market I 945 held its ground and benchmark bond spreads stayed within their recent range after it was projected that the bloc led by Giorgia Meloni had won around 44% of the vote, enough for a parliamentary majority but insufficient to amend the country's constitution.
The turnout was 64%, less than the previous record low of 73% in 2018.
This is close to what the opinion polls had indicated before the elections. The alliance missed a two-thirds majority if results are confirmed, said Felix Huefner, economist at UBS, in a note to clients.
Huefner said that the joint manifesto of the right-wing alliance included proposals for higher spending, such as an increase in the minimum pension, hiring subsidies, and income tax cuts.
There are no official cost estimates, but some reports point to a potential volume of €80 bn 4 of GDP, which could be a potential risk to the debt outlook of 150.8% of GDP in 2021 if the plans are implemented, he said.
Moody s, the credit agency, said in a note late on Sunday that Italy's debt pile was vulnerable to negative growth, funding cost and inflation developments. Such concerns had caused some selling of Italian government bonds in recent months, pushing the spread of German benchmark 10 year German bunds above 250 basis points in July, as investors demanded more payment for taking on the risk of Rome s paper.
However, traders have become more sanguine of late, betting that Meloni was less spendthift than her coalition colleagues in League and Forza Italia and the new administration wouldn't break down restructuring pledges and could lose support from the European Union.
The right bloc's agenda has pledged major tax cuts, but Meloni herself warned against excessive fiscal deficits, according to analysts at Citi.
Citi says that the NGEU Next Generation EU disbursements create a major incentive for the next Italian PM to stick to the rulebook and not clash with the EU in the near term.
Italian 10 year bond yield BTP TMBMKIT - 10 Y, rose 11 basis points to 4.470% on Monday, but the move reflected fixed income angst across the region, with Spanish TMBMKES 10 Y, peers up the same amount and German bunds TMBMKDE 10 Y, adding 9 basis points to 2.11%. The spread of Italy's Germany was 236 basis points, less than the summer highs.
Milan's FTSE MIB stock index I 945, was up 0.6%, beating the European Stoxx 600 s SXXP fall of 0.5% as the Italian bank sector, heavily exposed to BTP s, gained 1.3%.
By early afternoon European trading was barely changed at $0.9965, which had faced more downward pressure on the new Italian government due to worries that the new Italian government might agitate within the EU.