Last Friday, rating agency S&P confirmed its credit ratings for both Italy and Greece. This decision will presumably have prompted little enthusiasm in Athens, whereas quite the opposite will no doubt be true in Rome, as in the run-up to the announcement in the former there had been hopes of an upgrade, while in the latter fears of a downgrade. In both instances, factors relating to political uncertainty play a key role. Despite what is on an EMU comparison strong GDP growth in Greece and the very favourable debt profile (despite its extreme size the duration is exceptionally long) S&P hesitated to let the positive outlook culminate in an upgrade. One main reason was the parliamentary elections in October, the outcome of which will also decide whether the reform policies get continued. As in the past, populist parties on the extreme left or right may play a not inconsiderable part in the formation of a government.
In Italy, the new people’s tribunes have as we all know gone a few steps further and, after marginalising the “established” parties have formed a pan-populist alliance. Alongside the global economic slowdown, S&P cites the government’s anti-reform and fiscally uncertain policies as the reason for the (technical) recession in which the country has found itself since mid-2018 (tomorrow the Q1 growth data are due out, and the consensus is that they will be minimally above the zero line). Nevertheless, despite weaker growth and fiscal figures compared to the last verdict, S&P eschewed letting the negative outlook lead to a downgrade. While BTPs have suffered since early April from the increasing spreads for Bunds (as lately as Thursday, the 10Y-BTP Bund spread was 270 Bp. and thus at its highest since mid-February) given the rating decision, spreads have narrowed (last status: 257 Bp.).
In other words, the S&P rating reports once again show the major impact of the spectre of populism, which abounds not just in Europe; after the ballot boxes, its influence inevitably affects political decisions and at the end of the day the financial markets, too. Precisely in the context of the European elections, those voices warning against it are likely to become louder, whereby the counter-measures initiated to date by the established political elites do not seem to be successful, as the example of France shows. The recently concluded civic dialogue floated as a response to the Yellow vests’ protests has resulted in a series of measures that President Macron presented last week at a major press conference. They included, amongst other things, income tax reductions of EUR 5 billion and inflation pegging of pensions of below EUR 2,000 from 2020 onwards – to be counterfinanced by corresponding expenditure cuts. While the following Saturday, the number of those taking part nationwide in the Yellow Vest protests was 24,000 and therefore at its second lowest level since the beginning of the movement, the hard core of the protesters is unlikely to be placated by these monetary gifts. A little more success may come from the attempt at symbolism: For example, Macron intends to abolish the elite French civil service college, the ENA, as in the eyes of many French it represents a kind of caste system run by a centralised national elite that has no links to the grass roots.