Copying and distributing are prohibited without permission of the publisher.

Watermark

Mario Draghi, a Martian in Rome

draghi
By Paola Aurisicchio
23 Feb 2021

In 1954 Ennio Flaiano, an Italian screenwriter best-known for being one of the writers on Federico Fellini's 'La Dolce Vita', wrote 'A Martian in Rome', a satirical short story about an alien who lands his spacecraft in the Eternal City, sending it into a frenzy. Mario Draghi's arrival in Rome as Italy's prime minister just over a week ago saw a man, just as alien-looking to Italian politics as any Martian, take a seat at its very centre. His arrival has been just as sensational so far for the country and its capital markets but how effective will he be in the long-term?

In Flaiano's story, crowds pour into the street blocking traffic, shops lower their shutters, women faint when the alien passes and the authorities fence off the spacecraft allowing it to be seen only upon payment of a small fee.

The curiosity about the new arrival brings with it the hope that "now, everything will change." 

Super Mario or The Drake, as the former head of European Central Bank (ECB) is called in Italy, has brought something just as unfamiliar to Rome, not to mention a big reputation. With that come similarly large hopes.

In sharp contrast with the verbosity of some of his predecessors, the new prime minister has imposed himself almost in silence. He does not use social media and his only speech has been to lay out an ambitious reform programme.

Draghi, famously, does whatever it takes and this has imbued a feeling of competence in a country where recent political history has shown that qualifications do not always matter. Previously boisterous politicians and pundits are looking at Draghi in awe, barely daring to contradict his authority.

Bond market players are enthused by the possibility he will steer Italy through the coronavirus crisis with the same success with which he steered the ECB — and by extension, the BTP market — through the eurozone sovereign debt crisis almost a decade ago.

A seismic rally in BTPs followed Italy offering Draghi the keys to the Chigi Palace, as 10 year yields fell from 0.651% on February 2, the day before he was officially approached, to a low of 0.458% nine days later. Meanwhile, the spread to 10 year Bunds narrowed by 18bp between February 2 and Tuesday.

Italian bank debt, an asset class not without its troubles, has fared well too. “Spreads have moved back to the level where they were before the Covid-19 pandemic in terms of the absolute cost and the spread between preferred and non-preferred senior,” said Alessandro Lolli, head of group treasury and finance at Intesa Sanpaolo speaking last week with GlobalCapital.

The confidence in Draghi's international profile has made the country less afraid of the word 'spread', after every Italian was forced to add it to their lexicon 10 years ago.

In 2011 the spread between the yield on 10-year BTPs and the German Bund rose above 5%, the level at which Greece had been forced to seek a bailout from the EU.

A collapse in confidence caused not just BTP investors to freak out, but Italians in general as the Bund spread became a topic discussed in bars over an espresso.

That forced Silvio Berlusconi to resign from his third term as PM. The economist Mario Monti, Italy's first technocrat leader, took over with a mandate to use austerity to cut Italy's €1.9tr of debt.

Draghi may also be an economist by training but he is no cold technocrat like Monti in the eyes of his compatriots. Rather, many see him as something rather more enigmatic, thanks to what they consider three novel features in an Italian politician: verbal economy, a long-term vision and pragmatism.

Speaking in front of Italian lawmakers last Wednesday, in his first and only speech so far as PM, he outlined how Italy would spend the €210bn from the so-called Next Generation EU recovery programme, focusing on digitalisation, ecological transition, research, training, and health. He also said his government would combine the investment of EU funds with structural reforms and adjustments to Italy’s tax system.

Draghi vowed investment for retraining workers for sustainable, high tech jobs, particularly in Italy’s underdeveloped south. He promised to combat the dual problems of unemployment — the rate among Italian youth is over 30% — and to meet the need to transform the country's economy, which contracted 8.8% last year.

Draghi also made it clear how important his mission is for the EU, not just for his country. "Unity is not an option but a duty," he said, "There is no sovereignty in solitude. Without us, there is no EU,"

The same day, Intesa Sanpaolo launched a long awaited debut senior non-preferred deal taking advantage of gathering investor optimism about Italy's new direction.

The day before, the sovereign had demonstrated the appetite for Draghi-era Italian credit, luring over €81bn of orders into the syndication of a new10 year BTP and a new 30 year inflation linker, paying a minimal new issue premium in the process. 

Draghi's challenge will be to live up to the hope that he can change Italy and fend off the no doubt vicious political challengers, who have so far kept quiet but surely will not remain so.

It will be no easy task; Italian political administrations last about as long as one of those espressos. The country is on on its 67th government and 30th PM in the 75 years since its Second Republic was formed. 

At the end of A Martian in Rome, Italians forgot about the alien, having grown used to his presence and he left Rome to go back to Mars.

For the good of Italy and its capital markets, we must hope first of all that Draghi has enough time for Italians to grow similarly used to his presence, but also that he doesn't take off before he has had a chance to complete his work.

By Paola Aurisicchio
23 Feb 2021