Alberto Forchielli: spread signals referendum alarm, “we’re risking the Troika”

Interview, Clinton is hobbled and Trump is a nightmare for the stock market
It’s a spread “alarm”, with the differential flying to 162 base points— the highest since the Brexit vote— which signals high tensions only a few weeks before the referendum. Seen from investors’ perspective, a “no” victory risks mortgaging any future chance of stopping the continually rising public debt. And, it risks bringing the Troika back to Italy’s gates.
These are the words of Alberto Forchielli, founding partner of the private equity fund, Mandarin Capital Partners, consulted on the engorgement of risky appointments over the coming months. Italy’s vote on December 4th is one of these, Forchielli tells us over the phone from Bangkok.
“It’s clear that market tensions are manipulated by politics— the Italian financier starts— but there’s a lot of uncertainty, and the situation worries Europe, where people say that Renzi has sold a reform project, and now with the referendum comes a litmus test.”
The point, seen from an investor that knows the markets and lives between Boston, Imola, and Bangkok, is that Italy “need to escape from ‘Rumor syndrome,’ that has seen every government (with brief exceptions) resort to public spending, and therefore debt, just to maintain consensus and avoid falling out of favor.” In the eyes of investors, to get a handle on Italian public debt, the third highest after Japan and the US as a proportion of stock, we need a stronger government that lasts five years.
“And if Italy doesn’t stop accumulating debt, it’s clear that, sooner or later, we’re heading for the Troika,” says Forchielli. The acquisition of debt by central banks, even in Europe where German pressure on Mario Draghi is getting strong again, “can’t last forever.” And for Italy, the end of ECB interventionism, that made average interest rates on government bonds fall more than 3% to 0.8% in three years, will present a “redde rationem”, a big unknown: “each percentage point of increase in the price of debt costs us 23 billion per year,” Forchielli explains.
If you add Brexit, and especially the US presidential vote in only a few days, the risks for the markets are high. The FBI’s latest release on emailgate has weakened Clinton’s chances. Five Thirty Eight, a blog that hasn’t called the last two rounds of voting wrong, gives democrats a two thirds chance of winning over Trump. But the markets are quivering. “Even if she’s elected, at this point Hillary risks an indictment and an impeachment,” Forchielli says, who considers Washington a second home and frequently testifies in Congress on matters relating to China.
Paradoxically, Clinton is more of a hawk than Trump in foreign politics: many market players fear that “the democratic fringe that wants to reaffirm Washington’s global hegemony and take a harder stance toward Putin— held at bay by Obama— will come back to the fore.” On the other hand, with the most recent revelations on emailgate, Trump’s no longer out of the game. He could get more votes than people expect. And the latest polls say that Hillary might not get the threshold 270 electoral votes.
But the New York financier, who has drenched his political campaign in protectionism, could be terrible for the economy (Citigroup is even hypothesizing a recession): Trump, Forchielli explains, “is trying to follow up on his promises to block Chinese exports. We’re risking rash moves that wold create turbulence for international commerce.”
 
Alberto Forchielli interviewed by Domenico Conti, ANSA 05 November 2016