Separating the signal from the noise is not always easy, especially in Italy. However, this time the signal is loud and clear: Italy is going for fiscal loosening. It’s the wrong approach for several reasons, the Financial Times reported in a commentary. If the aim is to tackle the country’s high debt through faster economic growth, the old-style stimulus that is being proposed will not work. It generates only a temporary boost to demand, leaving the country with an even higher debt burden and elevated borrowing costs.
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Italy’s bond markets may be underpricing the risk of the nation having to restructure its debt, Bloomberg News reported. Credit default swaps, which protect investors against the nation failing to pay off its debts, suggest that Italian debt securities are still too expensive, according to NatWest Markets. To counter that, investors should place a curve flattening trade, betting on short-dated bonds selling off more than those further out, it said.
Italy’s government late Monday approved a draft budget law for next year, confirming a set of expansionary measures that could lead to a fast-rising deficit and a conflict with the European Union, The Wall Street Journal reported. The government, a coalition of the antiestablishment 5 Star Movement and the far-right League, has rattled financial markets in the past month with its budget plans, with investors demanding significantly higher interest rates to buy the country’s bonds. The full draft budget law will be sent to the Italian parliament by Saturday.
A major eurozone country has elected new leadership on promises to loosen the purse strings in defiance of bond markets, Berlin and bureaucrats in Brussels. The message to Chancellor Angela Merkel, Europe’s most powerful leader, is uncompromising: “People have made a choice which envisages a renegotiation of the fiscal treaty. It’s not Germany that decides for the whole of Europe.” These are not the words of Italy’s populist leaders preparing to send a rule-breaking budget to Brussels, the Financial Times reported.
Italian banks face a 102 billion-euro headache, just when they’re least ready to deal with it, Bloomberg News reported. That’s how much they’ve lent to the country’s stumbling construction companies, according to data from the Bank of Italy. But with Astaldi SpA readying plans to restructure as much as 2.5 billion euros of debt, three of the top six Italian builders are now either insolvent or negotiating with creditors. The construction sector accounts for the highest default rates in Italy, the data show.
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Greece’s central bank governor has blamed Italy’s market turmoil for a drop in the share prices of Greek banks, saying that the falls “are not related to the soundness of Greek banks”. Italian government bonds have seen a fresh sell-off in recent days, as investors mull the growing likelihood that Rome will face-off against Brussels over a budget-busting spending plan, the Financial Times reported. In the past two weeks the yield on 10-year Italian debt has risen by 80 basis points, to hit 3.712 per cent — its highest level since early 2014.
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Brussels has been “overly generous” to Italy’s government, allowing it to flout the EU’s budget rules last year, the head of an independent watchdog has said, fuelling criticism of the European Commission’s policing of the bloc’s public finances, the Financial Times reported. Niels Thygesen, the chair of the European Fiscal Board, told the Financial Times the European Commission had gone “beyond” the necessary flexibility allowed to Italy during the country’s budget negotiations with Brussels in 2017.
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The spread between the cost of Italian and Spanish debt is at its highest level for more than 20 years, in a sign that investors remain unconcerned about the future of the eurozone despite Italy’s spiralling bond yields, the Financial Times reported. Italy’s 10-year yield hit 3.71 per cent on Tuesday, its highest level since February 2014, after the country’s finance minister Giovanni Tria failed to alleviate growing investor jitters over its fiscal position. Short-dated bond yields also rose, although they remain below the highs they hit earlier this year.
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