The selloff across Italian assets returned on Friday, with stocks and bonds sliding as traders had a chance to go over the additional budget details released on Thursday evening and consensus quickly forming that the controversial budget plans of Italy’s populist government are hanging on an economic premise that looks too optimistic.
Italy’s GDP projections now include growth of 1.5%, 1.6%, and 1.4% over the next three years. By comparison, the median in Bloomberg’s latest survey is for expansion of no more than 1.2 percent. According to Deutsche Bank, “this is much more optimistic than forecasts from DB’s economists, the Bank of Italy, the ECB, the IMF, or the private sector consensus.” Rome also said that with the current legislation, GDP growth would be 1.2% for 2018.
Debt to GDP is also to be targeted at 130.0% in 2019, 128.1% in 2020 and 126.7% in 2021 while the deficit, as we already knew, was confirmed at 2.4% for next year, 2.1% in 2020 and 1.8% in 2021.
The “growth targets are ambitious, but not unrealistic and could be exceeded for at least two reasons,” Finance Minister Giovanni Tria said in the foreword to the report including the new estimates and targets. The finance chief mentioned the impact of planned investments and the elimination of legal and bureaucratic obstacles to their full implementation as well as a gradual reduction of public debt financing costs after tensions on financial markets subside.
“Whilst government forecasts always fall on the optimistic side, this particular assumption hints at significant fiscal slippage risk ahead in case of an economic slowdown,” said Axel Botte, a strategist at Ostrum Asset Management.
La Stampa also reported that ECB’s Draghi met with Italy President Mattarella on Wednesday, and may have warned about the budget and discussed the government “undervaluation” of effect on market. Draghi is also said to have warned about the trend of the Italian bond spread in the context of the winding down of the ECB’s quantitative-easing program.
In any case, with Italy’s highly unrealistic budget now public, traders resumed selling Italian stocks on fears it will be summarily rejected by Europe, and the FTSE MIB benchmark index dropped over 1%, the worst performer among major European markets on Friday.
Meanwhile, Italian BTPs breached yesterday’s worst levels after Ansa reported that Deputy Premier and Interior Minister Matteo Salvini blasted European Commission President Jean-Claude Juncker and Economic Affairs Commissioner Pierre Moscovici after they criticised the Italian government’s budget plans.
“The EU said yes to (past) budgets that impoverished Italy and made its situation precarious,” Salvini told a fair staged by agriculture association Coldiretti in Rome. “So I don’t get up in the morning thinking about the judgement that people like Juncker and Moscovici, who have ruined Europe and Italy, have of the government and of Italy.”
“They can say what they want. We’ll keep going straight on with peace of mind”.
On Wednesday, Salvini said that debt will decline “because more people will go back to work.” But short-term fiscal stimulus won’t solve longer-term issues that have left Italy as the slowest-growing economy in the euro area.
“The reality is that Italy’s problems are not about whether it meets its budget deficit next year or the year after,” Talib Sheikh of Jupiter Asset Management told Bloomberg Television. “It’s about can they undergo some deep-seated structural change. Italy’s ultimate problem is a lack of structural growth and it’s not clear to me that many of the populist agendas make any step toward that.”
The renewed war of words between Italy and Brussels after a few days of detente, is not what the market wanted to see, and the result was a prompt selloff in Italian bonds, with the 10Y yield rising as high as 3.422%, just shy of Wednesday’s highs which were the highest going back to early 2014. The drop was led by the front end, with 2y yields climbing as much as 21bps to 1.42% as the Italian budget crisis is nowhere close to getting resolved.
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