Bankinter: It is only a recommendation because fiscal policy is the competence of each member state, but it has consequences on inflation, monetary policy and bonds. The EC relaxed the Fiscal Deficit and Public Debt targets due to the CV19 pandemic (2020) and the Russian invasion of Ukraine (February 2022), but for months it has been insisting on the need to return to fiscal discipline in 2024. The key date is 15/Oct. when member states must submit their 2024 budgets to the EC. The magic figure is 3.0% Deficit/GDP. Under the current regulation, countries with a Deficit/GDP >3.0% must reduce the fiscal imbalance at a rate of 0.5%/GDP per year.
Market impact: 10A bond yields rallied across the board yesterday, especially in countries with higher deficits such as Italy (4.78%; +5.0 b.p.) or France (3.41%; +4.5 b.p.) because its government does not expect to reach the deficit target before 2027. With the exception of Germany and the Netherlands, the main economies are well above the 3.0% deficit/GDP target. France expects to reach a deficit of 4.4% in 2024 (vs. 4.9% expected for 2023) to come down to 2.7% in 2027. Italy has just lowered its GDP growth forecast to +1.2% in 2024 (from +1.5%) with a Deficit of 4.3% (vs. 5.3% expected in 2023). Ultimately, member states must address budget imbalances in order not to hinder the ECB’s management – it could be forced to maintain a tight monetary policy for longer -, avoid possible EC fines and an undesired increase in risk premia. We think this is a key aspect for the short term evolution of bonds, in addition to Inflation and the oil price.