Italy budget drama is not over yet – Standard Chartered

“Italy budget drama is not over yet; further confrontations with the EU are likely,” argue Standard Chartered analysts.

Key quotes

“Italy’s Finance Minister Giovanni Tria has backtracked on the government’s medium-term budget plans following negative reactions from financial markets and the European Commission (EC). Having previously targeted a deficit of 2.4% of GDP in each year out to 2021, Tria announced on 3 October that the deficit would instead be trimmed to 2.2% in 2020 and 2.0% in 2021, prompting a retracement of Italian bond yields. However, despite Tria’s comments, we still think there is a good chance that these targets will be deemed non-compliant with EU fiscal rules once key growth assumptions are presented to the Commission (by 16 October at the latest).”

“We think any resurgence in Italian financial-market volatility – particularly a sharp rise in borrowing costs – will be more effective in limiting the coalition’s fiscal ambitions than any admonitions or threats from the EC. Moreover, possible downgrades by the credit rating agencies would exacerbate existing market tensions. However, over the longer term, we expect both coalition parties to maintain a confrontational posture with the EU, as this best serves their political needs. The nationalist Lega party has boosted its popularity since election day on the back of its battles with the EU over immigration, and if current polling trends continue, we think the prospect of an early general election being called (potentially by mid-2019) will rise too.”