One of UBS' top economists tells investors to 'take a deep breath and calm down' over Italy

UBS

Paul Donovan.

• Investors need to step back "take a deep breath and calm down," according to UBS Wealth Management's chief economist Paul Donovan.
• Italy's political crisis, and speculation that Italy could leave the euro, has been wildly overblown in recent days, he says.
• "Neither Italian parties nor Italian voters support leaving the Euro," Donovan wrote on Wednesday.

"Take a deep breath and calm down."

That's the advice given by UBS Wealth Management's outspoken chief economist Paul Donovan to investors, as markets continue to sell off in the face of political turmoil in Italy.

Italy's political situation deteriorated rapidly over the weekend, with the prospect of a fresh general election in the next few months now looming large. Commentators fear a vote could effectively become a referendum on Italy's membership of the euro.

Investors are worried about the possible collapse of the entire eurozone given Italy's importance. This would inevitably trigger knock-on effects for the global economy and these fears have driven a sell-off in stock markets across the world.

Donovan has urged calm, saying that fears the current crisis could lead to a euro exit for Italy are being overblown.

"Everyone needs to take a deep breath and calm down. Only then can we talk about Italy," Donovan wrote to clients on Wednesday morning.

He cited three reasons why there's no need to worry about a so-called Italexit just yet:

1. "Bond market moves do not break up monetary unions. Bank runs do. There is no evidence of bank runs."
2. "Neither Italian parties nor Italian voters support leaving the Euro."
3. "The anti-party coalition was not expected to last, because of policy disagreements. It is not certain that the two anti-parties would try to form a government after elections."

Not only are markets overestimating the risk of Italy leaving the EU, but many buyers and sellers are trading on inadequate information, Donovan argues, meaning that market moves are being exacerbated.

"We are now in that phase where any trader who overheard a conversation in their local Domino's Pizza takeaway considers themselves an expert on Italian politics," Donovan told clients. "Investors would be wise to treat recent market moves with caution."

Donovan is known for cutting through the noise when it comes to global market developments.