Hitt og þetta 9. apríl 2006

DJ FOCUS: Italians Vote; Eyes On Bonds, Enel, Mediaset

MILAN (Dow Jones)--Italians began voting Sunday in a national election likely to produce a new government that will hew to tighter budgetary policies after five years of fiscal laxity failed to produce economic growth.

If Romano Prodi's center-left coalition ousts Prime Minister Silvio Berlusconi and his "House of Freedoms" alliance, Italian government bonds should bounce up, but some stocks - in particular electricity giant Enel SpA (EN) and the Mediaset SpA (MS.MI) television broadcaster - may suffer a short-term slide, analysts and traders say.

As polls are open on Monday through 1300 GMT, and a new electoral law reduces the forecasting value of national exit polls, no clear picture of the result is expected until late Monday.

Prodi had a five-point lead in most opinion polls before a blackout period began last month, but political analysts say that Berlusconi's aggressive 11th-hour pitches may increase turnout in his favor.

Some analysts fear the "nightmare outcome" of a hung Parliament, which would likely require a new vote and spawn uncertainty sure to wreak havoc on Italian stocks and bonds.

After a campaign in which new spending plans crowded worries about Italy's public finances off the stage, whoever wins will have to huddle with his coalition to trim back their pledges, analysts say.

"Promises aside, whoever wins will from the day they take office start watching the screen for news from Standard & Poor's," says ING economist Paolo Pizzoli.

Both S&P and Fitch last autumn put Italy's sovereign debt on a negative outlook, and verdicts are expected by the end of the year. The downgrade would be Italy's second since joining the European Monetary Union in 1999.

Shares in Mediaset, the private television broadcaster controlled by the Berlusconi family's holding company, are likely to be active. If Berlusconi wins, then Mediaset should rise, says Citigroup analyst Roberto Odierna. A center-left victory would not necessarily lead to legislation detrimental to Mediaset, but could spur its only competitor, state broadcaster RAI Radiotelevisione Italiana SpA (RAI.YY), to improve its commercial programming and advertising performance, he says.

However, if the left wing of Prodi's coalition fares strongly in the vote, the government might well emphasize RAI's public service role, helping Mediaset, Odierna adds.

Mediaset shares closed Friday at EUR9.86, up 10% since Jan. 1.

Enel shares would benefit from a Berlusconi victory, analysts say. The company's current strategy is in line with the prime minister's support for greater use of clean-coal technologies, new liquefied natural gas terminals and expanding use of nuclear power generated in Europe, notes Goldman Sachs. It adds that Prodi's emphasis on compliance with the Kyoto protocol and desire to force Enel to hold power-capacity auctions would raise costs and help rival municipal utilities.

Morgan Stanley analyst Antonella Bianchessi notes that the center-left is also keen to boost competition in the power sector by supporting robust investment in the electricity and gas networks, moves that would help Terna SpA (TRN.MI) and Snam Rete Gas SpA (SRG.MI) respectively.

Enel shares, which have been affected in recent months by talk that it's planning a bid for French utility Suez (12052.FR), closed Friday at EUR6.88, up 4% in 2006.

The elections may have an impact on Italian bank stocks, as many lenders are controlled by foundations run by local political appointees whose views on mergers may depend on the vote.

And while Italy's weak public finances may raise bonds and their cost of capital, the country's weak economy is already fostering rapid growth in consumer credit, one of the more lucrative market niches.

Some analysts say that Prodi's plan to cut payroll taxes sharply may boost industrial companies with large employee bases in Italy, such as Fiat SpA (FIA).

Broadly, a Berlusconi victory is seen as better for stocks as his emphasis on cutting overall tax rates is seen as boosting corporate prospects.

Still, markets are likely to be subdued due to the dearth of detail candidates provided about how they can deliver on any of their plans. These plans include lowering the retirement age, boosting minimum state pensions, giving newborns EUR300 a month and, in a novelty Berlusconi tossed out in the final minute of a televised debate, scrapping a property tax that funds more than 10% of municipal services such as trash collection.

Instead, the winning coalition will be pressed quickly to outline a fiscal strategy. Italy has already agreed with the European Commission to bring its budget deficit below 3% of gross domestic product in 2007, in line with the Stability and Growth Pact rules, from 4.1% in 2005, but has not explained how it will do so.

Doing so will almost certainly require tax hikes or credible privatization programs that were not mentioned in the campaign, says ING's Pizzoli.

Most economists agree, and Barclays Capital even says that Prodi may be tempted to fund his promise to cut payroll levies by raising sales taxes.

On the other hand, Italy may simply not take the dramatic action that economists often say is necessary.

"We see this largely as a work of fiction, which neither party appears to have any intention of honoring," writes Barclays Capital in a note. "Clearly Italy will be in breach of the (Stability and Growth) pact and is likely to be in breach for some time. But equally clearly the (European) Commission cannot seriously demand the sort of structural fiscal tightening that would probably push Italy into recession and prove political suicide for the government."

Italy's challenge, says Lehman Brothers analyst Giada Giani, is that it must cut its public debt, which last year rose for the first time in a decade and reached more than 106% of GDP. The only ways to do so are to raise the government's primary surplus or for nominal GDP growth to exceed the average cost of debt, she says.

Italy posted almost no growth last year and has underperformed its euro-zone peers for all but one of the past 15 years. With its product specialties in slow-growth areas that are also exposed to global competition, Italy's share of global trade has been declining for years. And now, with the European Central Bank raising rates from record postwar lows, the cost of debt is rising.

Some investors are wary that the center-left may squelch growth, thus making serial spending cuts necessary.

"The left may claim a more enthusiastic approach to budget rigor, but the deficit is ultimately a function of GDP, and that means that if you don't have growth, it just gets harder," says the manager of a Milan-based hedge fund.

Referring to campaign remarks made by Prodi, he adds: "If Prodi freezes infrastructure spending, such as the bridge to Sicily and the train link in the Northwest, construction and engineering companies are going to be hurt. And how is tightening labor flexibility going to promote growth?"

Radical fiscal adjustments are now imperative for Italy, say Goldman Sachs analysts Francesco Garzarelli and Michael Vaknin. Another sovereign credit downgrade "is not ideal for a country that needs to roll over in excess of U.S. $500 billion worth of government securities each year, half of which (are) in the form of T-Bills."

Italian bonds have begun to slip, although many investors say the real reason is that Germany appears to have turned its own fiscal and economic corner and its debt is strengthening. Higher ECB rates are also prompting a flight to quality that translates to wider spreads on Italian bonds relative to German bunds.

But the market reaction to the election should be muted as far as Italian bonds are concerned, says Credit Suisse First Boston analyst Giovanni Zanni. Italian bonds are already pricing in some of the impact of a rating downgrade, and a Prodi victory would probably prop them up in the short term, most analysts say.

"Should Prodi win the elections, then the spread (against German bunds) might narrow by three to four basis points in the short run," says Nathalie Fillet of BNP Paribas.

The real problem, according to CSFB's Zanni, is that, regardless of the election, Italy's fragile public finances leave it exposed to particularly aggressive reactions in the case of an external trigger, such as geopolitical turbulence or a financial crisis.

But then, of course, the blame for the blow to Italian debt and asset prices could be passed on out of the country.

-By Christopher Emsden, Dow Jones Newswires; +39-02-58-21-99-05; chris.emsden@dowjones.com

(END) Dow Jones Newswires