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5 things to know about crisis in Italy and its impact
Publish date: 5th June, 2018
Over the last couple of days, the Italian Crisis has been spoken about quite a lot by the media and stock market pundits alike. This is mainly because Indian stock indices have taken a beating too due to this. If, like many others, you have been wondering about the Italian crisis too. Here’s a handy guide for you:
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Let’s first look at what is happening in the Indian stock market
On 30th of May 2018, Sensex fell by 214 points and the Nifty fell below 10,600 levels. Share prices of banks fell almost up to 3%. Markets were in the red for the second straight day. Many attribute some of this fall to the crisis in Italy. (Click here to know the current Sensex, Nifty levels)
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But what is this crisis in Italy about and why is it affecting the markets?
Italy – known for its picturesque countryside, delicious pasta, and beautiful churches—has been dealing with its share of troubles these days. Some of them are:
• An unemployment rate of 11%
• High public debt which is 132% of the Gross Domestic Product compared to 87% of the Eurozone
• Today Italy is the 5th most indebted country in the world
• Political crisis on government formation -
The political crisis
Elections held in Italy during March resulted in a coalition by two political parties with diametrically opposite views. The Five Star Movement (M5S) was largely supported by relatively poor constituencies in Southern Italy; the far-right Lega was backed by the richer constituencies in the North of the country. M5S has projected itself as a movement promoting e-democracy, sustainable development, environmentalism etc., whereas Lega has found favour with its anti-immigrant plank. However, both these parties shared a common vision – being Anti-European Union.
Recently this coalition government nominated Paolo Savona, an 81-year-old Italian economist and professor who is also a Eurosceptic politician, for the post of finance minister. This was stalled by Italy’s president Sergio Mattarella which has resulted in a constitutional crisis. -
So why did this result in a constitutional crisis?
This is because both the parties had worked out a deal to create a coalition. One of the aspects of the deal was to nominate Paolo Savona as the finance minister, which seems to have hit a roadblock. This may disturb the delicate political arrangement between both the parties and lead to re-elections.
Re-elections could result in the return of M5S with a stronger mandate. This could be deciphered as a popular vote to leave the European Union. This could spark financial uncertainty all across the globe. -
Why is this impacting the world and Indian markets?
For starters, any news about a country potentially leaving the European Union spooks the investor community. This has resulted in:
• Whenever there’s trouble around the world, investors prefer to invest in safer markets like the US. As a result, Italy’s exit from the EU could have a domino effect on the emerging markets. Even now, institutions are pulling out money from these markets including India and seeking the safety of US investments. The investor community also feels that the ripple effect of the political crisis in Italy could hurt global finance.
• Investors look for certainty which has attracted them towards the robust dollar. As a result, the US Dollar has gone from strength to strength during this crisis. This has a direct impact on India in two ways:
1. Impact on rupee: This is quite a direct impact. If the dollar rises, the rupee’s value falls. At a time when due to the rising crude oil prices, additional pressure can be negative.
2. Impact on stock markets: The Indian market is clearly correlated with the global markets. Foreign investment flows have been a deciding factor in the direction of Indian stock markets. However, their impact has reduced over the last few quarters. That said, if foreign investors continue to sell their Indian investments, it could put pressure on the Indian markets.
What next?
It would be worthwhile to keep an eye on the news and follow the developments in Italy. The impact may or may not be high on your investments directly, but it could certainly have long-term implications for the world economy.
In the meantime, you may want to read up on how India is correlated with the global markets and why foreign investments matter so much for India.
