More Political Problems in Europe

The Entry Points

More problems in Europe. The situation in Italy is very volatile, and the anti-Euro “Five Star Movement” is leading the polls. The bearish focus on govt. bonds should first be on Europe (and Japan), the US Treasury market should paradoxically benefit (for now). The rally in US Treasuries could be quite surprising, and we still have a partial long position in Treasuries, as a trade only:

Former premier Matteo Renzi quit as leader of Italy’s ruling party, triggering a re-election battle against minority dissidents that threatens the stability of the center-left government.

With critics from leftist factions threatening to abandon the Democratic Party, Renzi, 42, told the national assembly of the party in a Rome hotel on Sunday that he had handed in his resignation, acknowledging he was set back by defeat in the Dec. 4 constitutional referendum.

Renzi, who is expected to stand for re-election at a congress in April or May, denounced “blackmail by a minority” and infighting that he called “a gift” to the anti-establishment Five Star Movement.

Yield Spread

The prospect of a party split has helped widen the yield spread between Italy’s 10-year bonds and their German equivalent by the most since February 2014. It could benefit Five Star, which is neck-and-neck with the party, known as PD, in opinion polls and wants a referendum on Italian membership of the euro area.

Renzi has faced challenges to his reformist strategy and leadership especially since losing the referendum, which prompted him to resign as premier and sponsor current Prime Minister Paolo Gentiloni, a Renzi loyalist and fellow PD member, as his successor.

Renzi, who has pushed for early national elections in June or September, made no such appeal on Sunday and instead urged his audience to support Gentiloni and his government.

“Basta (enough) with discussions and polemics on the government,” Renzi said. “I ask you to applaud Gentiloni and his government because it is unthinkable that the congress be turned into a congress on the government.”

Renzi’s critics have urged him to drop pleas for early elections and pledge support for Gentiloni to remain premier until the end of the parliamentary term in early 2018. They also want more time to prepare a congress and primaries, and a more leftist program.

‘Red Flag’

At a meeting of dissidents on Saturday, critics of Renzi sang “Bandiera Rossa (Red Flag)”, an iconic song of the Italian labor movement. Enrico Rossi, president of the Tuscany region, called for “a party which is on the side of the workers” and derided Renzi for “trying to present himself as the Italian Macron” — a reference to independent French presidential candidate Emmanuel Macron.

Dissidents also include Roberto Speranza, a former PD chief whip in the lower house, and Michele Emiliano, president of the southern Apulia region and a possible challenger for the PD leadership.

Paradoxically, a breakaway could backfire on the dissidents in making early elections more likely as it could see some 20 members of the lower house, and about a dozen senators, leave the PD and weaken the coalition government.

“The Gentiloni government is our government. We back it and will continue to back it until” Italian President Sergio Mattarella decides to call elections, Matteo Orfini, PD chairman, said on the eve of Sunday’s assembly. “A split would shrink parliamentary support for the government and put it at risk.”

“We’re walking on a tightrope,” Gentiloni confided to his ministers, newspaper La Repubblica reported on Sunday.

A breakaway faction from the PD would have limited support. Only 4.3 percent of voters would back a new leftist party, according to an Ipsos opinion poll published in newspaper Corriere della Sera on Saturday.

The survey credited Five Star with 30.9 percent of the vote, against 30.1 percent for the PD, 13 percent for Forza Italia of ex-premier Silvio Berlusconi and 12.8 percent for the anti-immigrant Northern League.