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Analysts at ANZ explained that  the Italian government has agreed on a draft budget deficit of 2.4% of GDP for 2019 and must submit budget plans to the EU by October 15.

Key Quotes:

“Financial markets have responded by selling the euro and risk assets with the Italian stock market off 5%.

For fiscal sustainability purposes, Italian FM Tria had argued that a deficit just below 2.0% of GDP was required. Concern has therefore risen over future debt sustainability. Italian government debt currently stands at EUR2.34trn or 131.2% of GDP.

Under austere fiscal management, Italian debt-to-GDP had stabilised in recent years. The return to higher deficit raises concern about a self-feeding circle of higher borrowing, higher interest costs, a rising debt stock and ultimately, solvency.

How growth responds to fiscal stimulus and structural reforms will be critical in determining whether wider budget deficits are temporary or permanent. The market favours the latter.”