Populist hypocrisy and why it matters for markets

Populist parties such as Italy’s Five Star Movement are winning elections on platforms of transparency, reducing waste and removing corruption. But the biggest waste of money in Italy this year has been the party’s futile budget standoff.

  • By Craig McGlashan
  • 27 Nov 2018
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From its birth on the fringes of Italian politics to its rise to power as part of a coalition this year, Five Star has made a big play of the “waste” in Italian government spending.

One of its candidates, Paola Carinelli, told the BBC as far back as 2012 that, if elected, her priority would be: “In general, reducing wasteful spending — not throwing away money.”

That outlook — a vague term rather than targeted action — pervades in the party, as does the party’s lack of detail beyond vague notions of ‘waste’ and ‘corruption’.

But the capital markets provide a clear example of where Five Star, far from lowering the amount of cash the government wastes, has drastically increased it.

Since gaining power earlier in the year, then sparking a fistfight with the European Commission over its budget deficit plans, Five Star’s policies have led Italy’s government bond yields to balloon.

Rabobank analysts estimated on Monday that the spiralling borrowing costs over the past six months have led to a roughly €1.5bn spike in interest payments, compared with if rates had played out to market expectations in 2018.

“If the rates remain consistent with current market expectations, it will cost more than €5bn in 2019 and €9bn in 2020,” they added.

Five Star leader and deputy prime minister Luigi Di Maio probably didn’t read that report, but he may have had one eye on Italy’s borrowing costs when during a radio interview on Monday morning he switched from his previous intransigence over the budget deficit to suggest that the government could lower its deficit target. BTPs promptly rallied.

Di Maio should not win any praise for this action, however, because one of two things has happened.

He may have bowed to the pressure of the markets — as well as the threat of European sanctions over the rule-breaking deficit.

That is a complete U-turn on his earlier rhetoric of standing up to the markets and Europe. And, thus, completely wasting €1.5bn — by Rabobank’s estimate — of taxpayers’ money simply because he wanted to look tough but didn’t have the steel to see it through.

Five Star would have made plentiful political capital out of such a flip-flop by a mainstream party.

Alternatively, he has agreed some sort of concession from the Commission and is now easing his negotiating stance. Well, that sounds a lot like the ‘backdoor dealing’ that he and his party rail against when ‘conventional’ politicians do it.

And again, €1.5bn of taxpayer money gone.

One might argue that, as with US president Donald Trump, these populists are only doing what politicians have always done — exaggerate, bluster and, sometimes, outright lie.

But there is one key difference — and one that matters for the capital markets.

When populist politicians behave in such a way, their base supporters don’t care. It doesn’t affect them in the same way it would a mainstream politician.

Imagine if, in the corporate sector, shareholders could not hold a CEO to account for lying or any other unscrupulous behaviour. 

That’s where the markets are close to finding themselves with the rising number of populist rulers — nothing will shake their base’s support, however egregious their actions, making them akin to unsackable CEOs.

Markets can put pressure on these governments to behave better, but in the end it will be up to voters to decide whether they stay in power.

And if they are able to get away with more blatant forms of the kind of incompetence and corruption that they made their names rallying against, then markets will be unable to stop the undoubted damage to economies and the rule of law that they will wreak.

  • By Craig McGlashan
  • 27 Nov 2018

European Sovereign Bonds

Rank Lead Manager Amount €m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 16,575.88 26 9.55%
2 Barclays 15,585.79 20 8.98%
3 Citi 15,428.98 26 8.89%
4 HSBC 12,009.31 18 6.92%
5 BNP Paribas 11,235.58 17 6.48%

Dollar Denominated SSA (Excl US Agency)

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 44,072.83 119 12.29%
2 HSBC 30,286.67 79 8.44%
3 JPMorgan 30,034.04 86 8.37%
4 Bank of America Merrill Lynch 28,490.01 86 7.94%
5 Goldman Sachs 26,512.56 61 7.39%

Bookrunners of Euro Denominated SSA (Excl US Agency)

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 35,494.64 97 7.67%
2 HSBC 33,049.47 129 7.14%
3 UniCredit 32,836.18 95 7.10%
4 Barclays 32,248.82 64 6.97%
5 BNP Paribas 27,773.05 69 6.00%

Bookrunners of Global SSA (Excl US Agency)

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 81,585.39 290 6.81%
2 JPMorgan 78,905.10 458 6.59%
3 HSBC 75,328.25 308 6.29%
4 Barclays 61,512.07 243 5.14%
5 Deutsche Bank 54,387.29 174 4.54%