ITALY: REFORM AND MOMENTUM - WHY IT REMAINS A KEY OVERWEIGHT

What are the positives? Reform, reform, reform… Di CREDIT SUISSE Global Equity Strategy 1)  Article 18 has been abolished (for new employees), reducing job protection and increasing flexibility for firms. Specifically, firms with more than 15 employees will now   be able to fire workers for business reasons, without the risk of having to reinstate them, even if a dismissal is ruled unlawful. The enabling law is expected to becompleted in the coming months. The key is that total payoff limited to 2 years. Open ended contracts were up 51% Y/Y in April.2) Boosting the role of employment agencies (where temporary workers can be 20% of the workforce on a rolling 3-year basis).3) Companies do not have to pay social security contributions for the first three years for new permanent hires in 2015, as long as the new hire was previously unemployed (this applies to SME companies). The non-wage cost of employment in Italy is 28% of total costs, according to Eurostat. Additionally on a permanent basis, €80 per month tax credit for workers earning less than €26K (costing €10bn).4)  Cut in the corporate tax rate. In specific, the government decided to deduct the labour component (related to permanent workers) from the tax base of the Italian regional production tax (3.9%), which should reduce the rate by c10%. Additional, 15% tax credit on investment in capital spending above €10,000 and 25% tax credit on incremental R&D, 50% tax credit on ultra-fast broad band).5) Reforming the cooperative banks, with ten banks having to transform into joint-stock companies within 18 months. If they have more than €8bn of assets, then they have to be a joint stock company. 6) Putting in a system that allows politicians to make changes. Electoral reform (just been finalised, but effective as of July 2016) includes a `majority premium` to the party that achieves at least 40% of the votes (in that case the party would get 55% of seats), Parties of less than 3% of vote excluded; Reforming the institutional setting with a new architecture of the parliament, limiting the power of the Senate (set to be completed by end 2015). Constitutional reform (stopping veto of Senate in process, likely in 2016/17).7) Reform of the judicial system. This will involve amalgamation of small courts, strengthening special courts for companies, with a goal to limit the length of proceedings, digitalisating legal system. Also, the government created an anti-corruption agency and we find it encouraging that the statute of limitations will be extended by 2 years as will the prison sentence for anti-corruption.8) Product market reforms: `Destinazione Italia` took steps to liberalise the energy sector, and opened up closed professions.9) Change law on mortgage repossessions to reduce repossession time from 7 years to 5 years (compared to 2-3 years elsewhere). 10) Rise in foreign ownership: Etihad-Alitalia; KIA-Fondo Strategico Italiano; State Grid for China and CDP Reti; Hitachi and Ansaldo; Whirlpool-Indesit; Allianz-Milano Assicurazioni. 11) Other encouraging measures enacted: REIT status (helps to securitise real estate); avenues of finance (mini-bonds guaranteed by Central Guarantee Fund and allow insurance companies to lend to corporates)12)Trying to set up a bad bank if EU Commission will allow them to do so. We would also highlight that there has been limited trade union opposition so far to reforms. Additionally, although the poor result of the PD in the regional elections represents a setback for Renzi, it is unlikely to derail the overall reform effort or threaten political stability.