Italian Finance Minister Giovanni Tria is in an unenviable position.
He tried to convince Deputy PMs Matteo Salvini and Luigi Di Maio to respect E.U. budget concerns when setting fiscal targets, but they didn’t listen.
So here we are, two weeks after Italy’s dynamic deputy duo decided on a 2.4% deficit target for 2019, and Italian assets are a mess. Financials are down some 33% since April, yields are surging and the nefarious “lo spread” has widened out beyond 300bps.
Less than 24 hours after a Monday rout in Italian assets, Tria appeared before parliament to chat with lawmakers about the country’s fiscal trajectory and explain what exactly is going on in markets.
Suffice to say it didn’t go well. I mean, that’s not entirely fair. It could have gone worse, but markets didn’t seem particularly enamored with what Tria had to offer.
For one thing, he said low growth in Italy doesn’t allow for a reduction of the country’s debt-to-GDP ratio despite the government’s desire to see that ratio drop “significantly.” He also said global trade frictions could dent Italy’s growth trajectory and he reiterated the notion that Salvini and Di Maio are attempting to respond to the concerns of voters by pushing for a looser budget.
That latter bit is important. The political capital of Salvini and Di Maio waxes and wanes based on their willingness to push the issue when it comes to adopting expansionary fiscal policy to fulfill campaign promises. If they abandon their anti-establishment rhetoric in favor of a conciliatory tone in order to tamp down market angst, they will lose their legitimacy with voters because they rely almost entirely on the populist upsurge that’s swept through Western democracies over the last three years for their political survival. Without that, they don’t have anything.
Tria went on to reference the IMF’s decision to cut the outlook for global growth this year and next. “The outlook is not positive,” Tria said, adding that “the most updated forecasts for 2019 show a deceleration for advanced economies, especially for the major European countries.”
As far as the tension with Brussels is concerned, Tria reckons everybody just needs to take a deep breath. “A constructive dialogue with the EU Commission will start, and will look at the reasonable contents of what is contained in the budget [but] the tone should be brought down a notch”, he begged said.
Of course it takes two to tango, so while it’s fair for Italy to be irritated at Jean-Claude Juncker for comparing Italy to Greece last week, somebody might want to tell Salvini that just about the last thing he needs to be doing right now is holding joint events with Marine Le Pen like he did on Monday.
When it comes to “lo spread”, Tria continued to push the same old line about markets not giving Italy a chance to explain itself. “We think that the more we explain the budget measures the more we’ll have a fall in the spread which is at the current level unacceptable”, he said.
I’m reasonably sure he didn’t mean it this way, but here again Italy is tacitly suggesting that the spread between two bond yields is a living, breathing thing with a sense of purpose.
It would make some measure of sense to characterize the BTP-bund spread as “unpalatable” or “worrisome”, but “unacceptable” doesn’t really work well as an adjective there. There’s nothing to “accept” or not “accept” – it’s just a number. It’s not a conspiracy (as Salvini would have you believe) and even if it is a conspiracy, you’re reminded that for years on end, the ECB has rigged this game in favor of Italy by being the only net buyer of BTPs and thus ensuring that yields aren’t a reflection of economic reality. Now, reality is starting to reassert itself.
“We think it can go down to a normal level”, Tria continued, even though he probably should have just shut up about it. Then he said some more:
Though so far there hasn’t been an explosion as some feared, we are of course worried and as a responsible government we aim at explaining the budget and thus guide investors in our meetings in order to calm markets.
Well, “lo spread” is now at 312bps, or, for context, on pace for the widest close in half a decade.
Equities don’t seem to be buying what Tria is selling either. Italian stocks pared a brief bounce and are on the precipice of a bear market:
You get the idea. The damage control effort isn’t working and that’s thanks at least in part to Salvini’s steadfast refusal to close his mouth while Tria attempts to clean this mess up.
That 2.4% deficit target for next year isn’t great but really, it’s not horrific either. It could likely be explained away were it not for Salvini doing things like, as mentioned above, holding joint events with Marine Le Pen and saying things like the following while sitting right next to her:
We are against the enemies of Europe – Juncker and Moscovici – shut away in the Brussels bunker. The politics of austerity of the last few years have increased Italian debt and impoverished Italy.
Even if part of that is true, you don’t say that in the middle of a market rout and amid budget discussions, and you don’t hang out in public with Marine Le Pen ever, under any circumstances.
And you know, some of you will invariably say that the “eurocrats” must go and that Salvini is right and that as the elected representatives of the Italian people, Salvini and Di Maio are entitled to convey Italian angst, and on and on.
You’d be right to say all of that.
But what Salvini and Di Maio can’t seem to get through their heads is that while they have the right to say whatever they want, market participants have the right to price Italian debt accordingly.
Market participants also have the right to dump Italian equities en masse if Salvini and Di Maio refuse to shut up.
So you know, keep talking guys. Keep talking.
