And so, the Italian saga continues.
On Sunday, Reuters reported that the Italian government now expects the E.U. to ask the country to revise its draft budget. “Economy Minister Giovanni Tria and Prime Minister Giuseppe Conte unsuccessfully pushed for a reduction of the 2019 deficit target at a cabinet meeting on Saturday”, Reuters says, citing a source close to the negotiations.
This was largely expected, but it certainly won’t do anything to shore up flagging sentiment in the country’s equity and bond markets.
On Thursday, after the text of a letter from Pierre Moscovici and Valdis Dombrovskis to Finance Minister Giovanni Tria hit the wires, the BTP-bund spread ballooned out to 326bps, the widest since 2013.
“Last week’s EC letter to Italy, expressing concerns over its Draft Budgetary Plan sounded tougher than what we had anticipated, increasing the likelihood that the EC recommends opening an Excessive Deficit Procedure earlier by 30 November vs. our previous expectation of spring 2019”, Barclays wrote on Sunday, adding that “the realization of such a scenario would further unsettle sentiment, adding downward pressure on the EUR.”
Meanwhile, Cabinet Undersecretary Giancarlo Giorgetti flagged a risk to the country’s financial sector from rising yields. “The spread [to bunds] is a risk for banks, which we can’t ignore,” Giorgetti told Il Messaggero, adding that recent widening necessitates “a serious and responsible approach from the government.”
Italian financials have fallen for four consecutive weeks and are down more than 35% since April.
Moody’s of course downgraded Italy on Friday, but the outlook was Stable. The fact that the worst case scenario didn’t materialize should help shore up sentiment ahead of the S&P decision on October 26. “This was the softest move possible and should be a relief for investors,” SocGen’s Ciaran O’Hagan said Friday, adding that “BTPs will now perform on the back of the lifting of the uncertainties.”
Maybe. But whether or not the Stable outlook from Moody’s (and the read-through of that decision for S&P) will be enough to offset ongoing worries about the long-term viability of the current setup that finds Italy’s populists at odds with Brussels on a number of issues remains to be seen.
On Saturday, Salvini and Di Maio apparently resolved a dispute over tax amnesty. Both Salvini and Conte offered some perfunctory nods to European solidarity while speaking following a cabinet meeting.
“We acknowledge European institutions as our counterparties [and] we’ll sit down around a table for a constructive and peaceful dialogue,” Conte said at a news conference. “There isn’t and there won’t be any plan to leave the euro or the European Union,” Salvini added.
Color me skeptical.
For his part, Di Maio said this over the weekend about Italy commitment to the single currency:
We understood from conversations with people from the ECB and the markets, meaning investors, that the yield spread jumped because there is a concern that this government wants to leave the euro or the European Union. I want to say it here, there is no Plan B to leave Europe but only Plan A which is to change Europe.
He also noted that going forward, there will likely be “other solemn occasions to reiterate” Italy’s commitment to the bloc.