Italy: ECB's umbrella to protect bond market, despite uncertain political situation

Political situation: On 13 January, Italia Viva – a minor coalition partner led by former Prime Minister Matteo Renzi – pulled out of the ruling coalition, leaving the government short of a majority in the Senate. However, we believe that snap elections are unlikely for now. In our view, the most likely scenarios are: Prime Minister Giuseppe Conte could seek to win a confidence vote, with support from parties both inside and outside the ruling majority and also unaffiliated lawmakers (Gruppo Misto); Conte could step down, triggering a new round of talks that could eventually lead to a new administration, headed by Conte himself or another Prime Minister, with support from the same alliance; or a caretaker administration could be appointed to manage the government until the next election.