One day after Italy’s euroskeptic Lower House budget chief Claudio Borghi freaked everybody out by raising the specter of an EMU exit, policymakers were in what counts as damage control mode.
Italian assets have come under enormous pressure since Matteo Salvini and Luigi Di Maio set the 2019 deficit target at 2.4% over the (apparently loud) protestations of Finance Minister Giovanni Tria.
Friday’s bloodbath did not abate this week and while there are arguments to be made that the selling is overdone, you cannot discount the possibility of a self-feeding loop wherein market participants sell in anticipation of a ratings downgrade, driving up the country’s borrowing costs and thereby raising the odds that ratings agencies cast a wary eye at the country’s fiscal outlook.
Late Tuesday, Corriere della Sera reported that Italy’s draft budget plan will include plans to slash the deficit to 2% by 2021. According to reports, Italy backed down from a plan to keep the deficit at 2.4% when the E.U. applied more pressure. The deficit will be 2.2% in 2020, Corriere said.
The news was marginally positive and helped BTPs snap a four-day slide, but the bounce looks pretty feeble to me:
On Tuesday, 10Y yields hit their highest levels since 2014:
Italy conducted a BTP exchange today, swapping 2019 and 2020 BTPs for up to EU2.5 billion in 9/2028 bonds.
Italian stocks rose as well, with the MIB jumping more than 1.5% and Italian bank shares snapping a five-session slide. Here’s the FTSE Italia All Share Banks Index which is really all you need to monitor if you want to know how things are going in Italy (you can today’s gains to the right of the red box):
Tria and Di Maio played good cop/bad cop with markets on Wednesday.
Speaking in Rome, Tria said the government is committed to debt reduction as mandated by the E.U. For his part, Di Maio said this while chatting with reporters:
Either this is the people’s budget or it’s not worth it. The discussion in Europe on the budget law is very long. They are not going to say no tomorrow morning. We have to explain clearly what our objectives are. But it must be clear that if the statements against Italy are fueled by prejudices and not by discussions on the merits of the budget, then they must tell us if it is worth going to discuss it in Brussels, or if because of bias, as Italy is raising it’s head, people say the budget is no good.
Based on that, I would curb my enthusiasm for Wednesday’s likely fleeting bounce.