And Finally Italy Takes A Stand Against Brussels

The trick of the Italian budget lawThe Italian and EU flags waving at the Quirinal Palace

Last week the Italian Government approved a public deficit targets of – 2.4% of GDP for 2019-21 which will be included in the draft budget for 2019, which in turn will be sent to the European Commission on 15 October and the Italian parliament on 20 October (if the European Commission has given it the green light). The Minister of Finance, Giovanni Tria, has recently been under considerable pressure from the Lega and Five Stars, and has had to accommodate their electoral promises in the budget. This deficit objective is well above those set by the previous government which held sway until now: -1.6% in 2018; 0.8% in 2019 and 0% in 2020.

The budget includes a universal basic income of 780 euros per months for 6.5 million Italians (cost: 10 billion euros per year) and bringing forward the retirement age (through a measure still unspecified) which will mean the exit of about 400,000 people from the labour market.

In a note to investors, Bankinter estimates that any figure below -2% would have been well received by the market and that if it had been -2% the impact would have been neutral.

As it has finally been – 2.4%, and not just for 2019 but also for the next three years, we think that the outcome is clearly worse than expected. As a consequence, in a preliminary analysis we estimate that Italy´s risk premium, which rose from 233 bp to 256 bp on the day of the announcement, could continue to increase further, possibly around 260/270 bp.

Next 26 October Standard&Poors will revise its rating on Italy, currently BBB with stable Outlook. It is highly likely that, at least, it will downgrade the Outlook to Negative, although it could directly lower the rating one level to BBB-, but if it does this it will probably maintain the Outlook at Stable.

On the other hand, Patrice Gautry, Chief Economist with Union Bancaire Privée, there are three other consequences of developing these policy for Italian economy:

A ferocious debate with the EU; a harsh increase in capital costs for Italian companies, including the banks; and an increase in political instability, with the risk that the Minister of Finance could leave the coalition.

Moreover, this decision will increase the political pressures on other EU governments, could negatively affect the euro, favour German bonds as a safe refuge and will raise concerns about the outstanding reform of Italian banks.

To judge from the latest PMI data, lower than expected, the outlook for Italian growth remains complicated. Even a slight adjustment in GDP growth would cause the ratio of debt to GDP to grow again.


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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.