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Why rating agencies support Italian electoral reform

The new law is expected to strengthen Rome's sovereign credit profile by reducing political risk to economic and fiscal policy-making

Why rating agencies support Italian electoral reform

Claudia Astarita

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After the final approval of Italian electoral reform, the rating agency Fitch released a statement stressing the significance of the new law in emphasizing the progresses the country has made "in institutional and structural reforms that would over the medium term strengthen the sovereign credit profile by reducing political risk to economic and fiscal policy-making".

Despite this positive welcoming for the Italian new electoral law, Fitch remains cautious regarding future prospects of national economic reforms, stressing their dependence on political manoeuvring. The new law confirms Rome's commitment to "increase political stability, for example by guaranteeing winning parties (rather than coalitions) a majority in the lower house, via a run-off vote if necessary". Accordingly, the law is expected to "indirectly support Italy's sovereign credit profile by reducing the risk that bouts of political volatility lessen governments' durability and their capacity for structural reform".

However, Fitch's analysts have appropriately highlighted that the effectiveness of this important change "largely depends on the proposed constitutional reform, which would redefine the relationship between the lower and upper houses. Plans to reduce the latter's size and power would end the 'perfect bicameralism' that has often resulted in legislative deadlocks. Constitutional change is a lengthy process requiring multiple parliamentary votes and possibly a referendum".

Although it is true that Prime Minister Matteo Renzi's Partito Democratico (PD)-led coalition is currently counting on a majority in the lower house (the Chamber of Deputies), an that so far his high popularity ratings have enabled him to use the possibility of fresh elections to push measures through parliament (electoral reform included), nobody can be sure that this popularity will last forever.

That being said, Fitch confirms its positive evaluation on Italian reforms, emphasizing how the government have been pursuing important structural macroeconomic changes so far. "The Jobs Act came into force in March and could boost labour market flexibility and increase Italy's weak growth potential", and indeed Fitch's analysts believe that Italy will finally exit its deep recession this year. In particular, the rating agency argues that "the prospect of a modest cyclical pick-up and its favourable impact on public finances supported our decision to affirm Italy's 'BBB+'/Stable sovereign rating last month".

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