Good News! Italy Avoids Fiscal Persecution As Europe Calls Off The Dogs

Italian bonds are on an absolute tear.

Already enjoying a mammoth rally fueled in part by the ECB’s decisive dovish pivot and the renewed global hunt for yield, 10-year yields in Italy plunged another 16bps on Wednesday thanks to news that Rome will avoid the dreaded disciplinary procedure over the country’s notoriously troubled finances. This is quite something:

Since Brussels officially got the ball rolling on a process that, had it played out to the end, would have forced Rome to choose between paying a large fine or being in violation of EU law, Premier Conte and Finance Minister Tria have worked to allay fears, even as the country’s de facto leader, Matteo Salvini, largely stuck to his trademark belligerence.

Read more: EU Officially Comes For Italy

Efforts to placate European officials have picked up over the past week. On Tuesday, Conte and Tria sent the European Commission a letter pledging that ostensibly positive fiscal trends will continue into 2020, although they did not provide a deficit target for next year.

On Monday, news that Rome had lowered this year’s target to 2.04% was greeted with enthusiasm. 10-year yields fell below 2% for the first time since the May 2018 BTP meltdown.

Read more: Italian Yields Fall Below 2% For First Time Since Infamous Meltdown

On Wednesday, Moscovici said the EC “has concluded that a debt-based excessive deficit procedure for Italy is no longer warranted at this stage”. The good news came with the usual caveats:

We will need to continue to monitor Italy’s budgetary execution very closely in the second half of this year. We will also need to assess very carefully Italy’s draft budgetary plan for 2020, which must reach us by 15 October. I welcome Prime Minister Conte’s willingness to pursue a constructive dialogue with us with a view to ensuring that the draft budgetary plan will be compliant with the preventive arm of the Pact. This is good news for Italy, for the euro area and for the credibility of the common rules that underpin it.

On Tuesday, Italian 2-year yields fell back below zero – now they’re at -0.02%. Meanwhile, the BTP-bund spread has tightened to 208bps which, on a simplistic read anyway, suggests Italian equities could outperform the broader European market barring some kind of political blow up.


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