That didn’t take long.
Two days after boldly threatening to take down Italy’s populist-led government should lawmakers try to change the 2.4% projected budget deficit that has locked Italy into a geopolitical staring contest with the European Commission, Deputy Prime Minister Matteo Salvini has become the first to blink.
Salvini, the deputy minister who is effectively in charge of Italy’s government (a view confirmed by opinion polls), told Italian media for the first time on Monday that his government would be “open” to a lower deficit spend after an anonymous official said the government was looking at changes to the budget plan’s deficit target. Last week, the European Commission roiled Italian markets when it issued an unprecedented rejection of Italy’s 2019 budget planned and started preparing for an “Excessive Debt Procedure” against its third-largest economy – a proceeding that could lead to billions of euros of fines against the already-struggling Italian government.
As a reminder, here’s how the EDP would play out if members of the Eurogroup decide to approve the proceeding:
Salvini told AdnKronos that “nobody is fixated” on the deficit target, and that it was more important to pass a budget that would fund the social-welfare expansions that the Italian government is planning – from increases to pension benefits to the controversial “citizen’s income” that would put up to 780 euros a month into the pockets of the poorest Italians.
Earlier, Deputy Premier Matteo Salvini told AdnKronos that next year’s shortfall in finances could be lower than the government’s target. Asked about the 2.4 percent target, Salvini reportedly told the newswire: “I think nobody is fixated on this, if there is a budget which makes the country grow, it could be 2.2 percent or 2.6 percent.”
Salvini spoke ahead of a budget meeting set for 7:30 pm Rome time (1:30 pm ET) where he would discuss the budget plan with Prime Minister Giuseppe Conte, Five Star Movement leader and fellow Deputy PM Luigi Di Maio and Economy Minister Giovanni Tria.
In a sign that Salvini’s comments weren’t just idle rhetoric meant to placate markets, Di Maio echoed the idea that the deficit target could be reduced as part of the final budget plan, so long as “not even a single person is kept out of the core measures.”
“If as part of the negotiation, we need to reduce the forecast deficit slightly, that’s not important to us. The issue is not the conflict with the EU on deficit at 2.4%, what’s important is that not even a single person is kept out of the core measures,” Di Maio said.
“What’s important is that this budget contain our main goals,” which include pension reform, citizens’ income, lower taxes, “things which we cannot give up,” Di Maio said.
Italian markets embarked on a torrid relief rally following Salvini’s remarks. The euro climbed as Italy capitulated and the UK and EU managed to put their differences aside and hammer out a final draft budget plan.
Italian bond yields dropped 17bps to 3.23%, with the spread between the 10-year BTP and 10-year German bund falling below 300 basis points, while shares of battered Italian banks soared, notching their largest intraday gain since early June.
The FTSE-MIB index of bank shares jumped 3.2%, the most since June 11 while shares of Intesa Sanpaolo SpA and UniCredit SpA climbed more than 5% each.
However, given that a weekend meeting between Conte and EC President Jean-Claude Juncker failed to produce any progress on the issue, analysts said the Italian news should be view skeptically. Bloomberg pointed out that the rhetorical shift followed a lackluster auction of Italian bonds, which has risked tightening financial conditions to the point where they would wipe out any benefits from the fiscal stimulus.
“Today’s news should be treated with caution,” said Antoine Bouvet, a strategist at Mizuho International. “The reports that the budget target would be lowered to 2-2.1 percent is emanating from League officials. It is far from sure Five-Star ministers would agree to such a cut, as it would likely compromise their flagship policy: the citizen’s income. So, in the short term, the optimism might be disappointed but the trend is still toward lower Italian yields.”
And while the remarks have instilled hope in markets, this won’t last unless these words are followed up with actions.
“Markets will hope this is a first sign that the government is blinking in the staring contest” with investors and the European Commission, said Aila Mihr, an analyst at Danske Bank. “Eventually, the government will have to back up their conciliatory remarks with actions, or the current positive market sentiment risks being reversed.”
With ratings agencies, including Fitch, still exerting pressure on the Italians with threats of a downgrade, the populists are facing significant pressure to do something that would help placate the bond vigilantes who have punished their debt, as fears of a fiscal collapse triggered by surging sovereign yields have never been far from investors’ minds.
Given the soaring poll numbers that Salvini has enjoyed thanks largely to his stand against the EU, he only has so much wiggle room. The EU is still calling for the Italians to cut their deficit target below 0.8% to put it in line with the bloc’s budget rules. But that would force the populists to cut most of the social-welfare expansion that they ran on, which helped them win popular support in an unprecedented election back in March.
At the end of the day, roughly 60% of Italians still believe the EU is bad for Italy. As such, any perceived surrender to Europe would have serious political repercussions.
via RSS https://ift.tt/2P0YGKJ Tyler Durden