Non Italian investors will be forgiven for getting bored with the B word…

The question seems to be once again, “Will Berlusconi run again for PM after promising he wouldn’t, then saying he was thinking about it, then denying, and then leaking that he might?” And if does run, why would he do it knowing that the only unknown would be how big the loss is going to be?

The answer to the first question is that Bersani’s triumph in the primaries makes it more likely that he will end up running. The answer to the second question is always the same. Berlusconi doesn’t need to win, he needs to stay relevant not only for his legacy, but also to be able to have something to trade against his legal issues, still unresolved. A good result for Berlusconi would see Grillo and Bersani taking votes from each other and a PDL at between 10-20% in third place that would be able to say, let’s keep Monti for the good of Italy, and by the way, sort out the legal cases.

It is surprising that given this cacophony, the Bund BTP spread is down to 300bps or below. Here there may be two answers. The first is that the market sees through the B ploy and likes the idea of a Monti Bis. The second is that markets are now otherwise preoccupied and haven’t reacted yet…in which case, this spread may have seen its lows at least until mid-next year…