REUTERS/Remo Casilli

Italy's centre-left Democratic Party (PD) leader Matteo Renzi gestures as he appears as a guest on the RAI television show Porta a Porta (Door to Door) in Rome January 21, 2014.

Leaders of Italy's Democratic Party (PD) just concluded a meeting to decide the fate of the Italian government.

PD secretary and mayor of Florence Matteo Renzi is looking to unseat current prime minister and fellow party member Enrico Letta, and he now has the backing of the party in doing so.

Following PD's decision, Letta announced in a statement that he will tender his resignation to Italian president Giorgio Napolitano on Friday.

"Mr. Renzi reckons his electoral appeal and his strong support within the PD make him better equipped to push through the political, institutional and economic reforms Italy has sorely needed for a long time," says Nicholas Spiro, managing director of Spiro Sovereign Strategy.

"This is a high-stakes gamble by Mr. Renzi to force Mr. Letta to bow out so that he can assume the premiership, push through the much-needed electoral law and then decide whether it's better to go to the polls or govern for a few more years."

For markets, however, this likely doesn't mean much.

"It is important to remember that any switch in leadership is very unlikely to involve the holding of national elections — indeed given that electoral reforms have still not been passed it is certainly not in Renzi ’s best interests for elections to occur prior to these happening (as he could also become associated with the difficulties in passing any reforms)," wrote interest rate strategists at Rabobank in a note to clients earlier this morning.

"However, it should be remembered that even if Renzi does take over as party leader today he is likely to face many of the same issues as Letta with regards to making any progress with passing reforms through the Italian parliament (to do this he needs to win elections and for this to be certain he needs to first pass electoral reforms). Thus, although initial thinking would be that [Italian government bonds] would suffer as a result of the political uncertainty (and there will likely be a knee jerk reaction in the short term) we would argue that relatively little will have actually changed in the bigger picture — again assuming that the Democratic Party's coalition parties are prepared to support Renzi as they did Letta."





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