How likely is it that the forcoming decision of the Parliamentary Committe to ban Berlusconi from the Senate will lead to a crisis with a strong rise in Italian yields? In my opinion the probability is today slightly above 50%. Rather than on the survival of the Letta government, however, the likelihood of a rise in the spread depends on the fate of the electoral law reform: will the electoral law be reformed in such a way that produces a stable majority, before the elections? This is how I see things.
I give a very high probability (say 100%) to a Committee’s decision to ban Berlusconi from the Senate: this because any other decision by the Democratic Party, who has the majority in the Committe, will lead to the party’s disintegration.
Given that, there a two scenarios (see figure): either the Centre right prompts the fall of the Letta government or it does not. This is depends on how Berlusconi see his chances if new elections are held. Given the relatively good recent polls, I give the the Letta fall scenario an 80% probability.
In this case, there are again two possibilities: a new majority is formed (50% probability), with the Democratic party toghether with the “wets” from the Centre right or from Grillo’s M5S movement, or not (50%). In the latter case, new elections are scheduled with the existing electoral law.
If a new majority is formed, the new coalition may produce a new suitable electoral law (p=70%) or fail to agree (30%) and elections will be held with the old rules.
Summing up, the “good scenario” , the one associated with no interest spikes, is the one where either the Letta government survives, or where a new majority agrees on a suitable electoral reforms. Doing the math gives this scenario a 48% chance. The bad scenario, where elections, sooner or later, will be held with the actual electoral law, gets 52%.