The eye of the hurricane may have passed over Italy and the winds are again starting to pick up speed, because shortly after Morgan Stanley laid out what a worse case scenario for Rome could look like (ugly, read here), Italian bonds started selling off again, with 2Y yields rising to session highs following Italian premier Conte’s inaugural speech in which the populist premier spooked markets by reiterating that the new populist government will pursue a radical policy program, and highlighting legislative priorities that will be extremely costly – including the right to universal income, minimum wage, overhauling the healthcare system, prioritizing social rights, and so on – all without saying just how these will be paid for (spoiler alert: much more debt).
Conte also said that a new flat tax would be introduced, even if no timeframe has been provided, and there was no mention of avoiding the hike in sales taxes which is currently planned for 2019, or canceling the “Fornero” pension reform.
Amusingly, in the speech Conte also said that he plans on reducing public debt, although in light of the surge in spending which will not be financed with increased revenue, it is not clear how that can be achieved. As Bloomberg economist Stephanie Flanders notes “Italy cannot convincingly cut its public debt as a share of GDP without reasonable growth in nominal GDP (real growth plus inflation). Even the more optimistic forecasts do not point to nominal GDP growing much faster than 2.5% in the foreseeable future. By contrast, the average cost of its public debt is 3.1%.”
A much more important chart is the following from Morgan Stanley showing what would happen to Italy’s debt/GDP if interest rates rose even modestly from their artificially low levels.
As a result of Italy politely reminding the world that nothing has changed since the start of last week when the world woke up to the reality of a populist government in Europe’s 3rd largest economy, Italian 2Y yields have spiked….
… with the move starting to seep across the Atlantic, sending the dollar to sessions highs…
… and 10Y yields back to lows.
Via Reuters, here are the key excerpts from Conte’s speech (link to full speech here), highlights ours:
INTRODUCTION
“Today we come before you to ask for your trust not only in a government team, but also in a project for the change of Italy.”
“I do not think this is simple novelty. The truth is that we have brought with us radical change, of which we are proud.”
“I take on this task with humility, but also with determination, with the awareness of my limits, but also with passion.”
“The political forces that make up this government have been accused of being ‘populist’ and ‘anti-system’ … If ‘populism’ means the ruling class listens to the needs of the people … (and) if ‘anti-system’ means to aim to introduce a new system, which removes old privileges and encrusted power, well these political forces deserve both these epithets.”
EUROPE AND PUBLIC FINANCES
“We want to reduce the public debt, but we want to do it by increasing our wealth, not with austerity that, in recent years, has helped to make it (public debt) grow.”
“Italian public debt is fully sustainable today. However, its reduction must be pursued, but with a view to economic growth. Fiscal and public spending policy should be geared towards the pursuit of the objectives set for stable and sustainable growth.
“In Europe, these issues will be strongly pushed forward with the aim of changing its governance, a change already at the centre of reflection and discussion in all EU member states.
“We are optimistic about the outcome of these discussions and confident of our negotiating power, because we are facing a situation in which Italy’s interests … coincide with the general interests of Europe, with the aim of preventing its possible decline. Europe is our home.”
PENSIONS AND CITIZEN’S WAGE
“The government’s goal is to provide income support for families most affected by socio-economic hardship. The support … will be conditional on vocational training and job reintegration. We propose, in a first phase, to strengthen the employment centres.”
“We will also take action to help pensioners who do not have enough income to live in a dignified manner.”
“We need to cut the pensions and annuities of parliamentarians, regional councillors and employees of constitutional bodies … The so-called ‘golden pensions’ are another example of unjustified privilege that must be opposed. We will intervene on pensions that exceed 5,000 euros per month when the sum has not been covered by the contributions paid.”
TAXES
“Our tax burden, combined with an excessive amount of bureaucracy, has a negative effect on the relationship between taxpayers and the state, and on the competitiveness of our country.”
“The goal is the ‘flat tax’, which is a reform with fixed tax brackets and a system of deductions that guarantees the progressiveness of the levy in full harmony with the principles of the constitution. This is the only way to bring about a drastic reduction in tax evasion, which will have benefits in terms of greater tax savings, greater consumer spending and investments, and increasing the tax base.”
IMMIGRATION
“We will end the immigration business, which has grown out of all proportion under the cloak of fake solidarity.”
“We will forcefully seek the overcoming of the Dublin Regulations in order to obtain the effective respect of the principle of equal distribution of the responsibility to set up an automatic system of obligatory re-distribution of asylum seekers.”
“We are not and will never be racists. We want procedures that determine refugee status to be certain and speedy, in order to effectively guarantee their (refugee) rights.”
FOREIGN POLICY
“First of all, we intend to reaffirm our convinced membership of NATO, with the United States of America as a privileged ally.”
“We will support opening up to Russia … We will push for a review of the sanctions system, starting with those that risk humiliating Russian civil society.”
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