By Ambrose Evans Pritchard and cross-posted from The Daily Telegraph
It had been assumed that Silvio Berlusconi would control the Italian Right. Suddenly the EU could be looking at a Lega prime minister named Matteo Salvini who plays by very different rules
Large banks and hedge funds are quietly advising clients to brace for trouble ahead of the Italian elections in early March, warning that a late surge by anti-EU populist parties threatens to shatter Europe’s brief political calm.
A new batch of polls over the weekend showed a further hollowing out of the Italian political centre, with rising risks of gridlock or even the “nightmare scenario” of a radical coalition in open breach of EU treaty law.
Markets have become inured to political risk after a series of false alarms: the election of Donald Trump, and populist jitters in Holland and France. Worries over a global financial shock from the Brexit referendum were shown to be absurd.
But this may have led to complacency over Italy, which faces the double danger of electoral chaos just as investors start to fret about the tapering of bond purchases by the European Central Bank, currently the only major buyer of Italian treasury debt.
“Italian corporates do no offer enough political risk premium ahead of the March 4 election. We would recommend cutting exposure to the region,” said Matthew Bailey, a credit strategist at JP Morgan.
Regulatory filings by the world’s biggest hedge fund, Bridgewater, show that it has taken out a giant $22bn (£16bn) “short” position on European equities (as of early February), with big bets against Italy’s Intesa Sanpaulo and Unicredit, and the energy groups ENI and ENEL.
Bridgewater is also targeting firms in France, Spain, Holland, and Germany, but what is striking is that it tripled its short bets against Italy to $3.2bn between October and February.
This coincides with the steady rise of rebel parties and the seeming death spiral of Italy’s ruling centre-Left, the main home for pro-Europeans. A new Demetra poll showed the Five Star movement, founded by neo-anarchist comedian Beppe Grillo, pulling far ahead as the biggest single party with 29.4pc of the vote.
The other upset is that the firebrand hard-Right Lega Nord has drawn neck and neck with Silvio Berlusconi’s Forza Italia and could be in the extraordinary position of picking the next prime minister under the coalition deal of the combined political Right, if they secure a combined majority as looks increasingly likely.
This would propel Lega leader Matteo Salvini – who calls the euro a “crime against humanity”– to the centre of European politics. “If we win by one vote, Salvini will be prime minister, it is as simple as that,” said Claudio Borghi, the party’s economics spokesman…