Italian government bonds were set for their worst day in more than three months after key Italian government officials overnight agreed on a budget that would see the country run a deficit next year and beyond.
The Italian government on Thursday targeted the budget deficit at 2.4 percent of GDP for the next three years, defying Brussels and marking a victory for party chiefs over Italian Minister of Economy and Finances Giovanni Tria, an unaffiliated technocrat.
“There is an accord within the whole government for 2.4 percent. We are satisfied, this is a budget for change,” Italian deputy prime ministers Luigi Di Maio and Matteo Salvini said in a joint statement after meetings with Tria.
Photo: AP
However, European Commissioner for Economic and Financial Affairs Pierre Moscovici yesterday said that Italy’s plans to vastly expand its deficit spending appear to breach EU budget rules.
“It is a budget which appears to be beyond the limits of our shared rules,” Moscovici said on BFMTV and RMC radio.
The concern for investors is that this budget not only puts Italy at odds with Brussels, but that the anti-establishment government is not committed to tackling the nation’s immense debt pile.
“The 2.4 percent target is not consistent with an improvement in the structural budget balance, and hence they seem to be on a collision course with Brussels,” ING strategist Martin van Vliet said.
“And moreover for me the key issue is what they assume on the budget beyond 2019. They are seemingly leaving the path of fiscal consolidation and they may not sit well with ratings agencies,” he said.
Italy’s rating is a particular concern, as the nation is only two notches above the dividing line between investment grade and junk.
Italy’s two-year bond yields — which have been most sensitive to political noise in recent months — were up 31 basis points in early trade at 1.09 percent.
Other Italian yields were also higher on the day, with five-year yields up 26 basis points at 2.16 percent and benchmark 10-year yields up 17 basis points at 3.08 percent.
At this rate, all three bonds are set for their highest rise since Friday last week.
The closely watched Italy/Germany 10-year bond yield spread was at its widest in three weeks at 256 basis points.
“We see potential for the 10-year BTP-Bund spread to reach 300 basis points over the coming two weeks — albeit being capped there due to Tria remaining on board,” Mizuho International PLC head of rates Peter Chatwell said.
“What is crucial next is the first glimpse of a reaction from the European Commission,” he added.
Meanwhile, the euro dropped to an 11-day low of US$1.1617 percent, down 0.2 percent on the day while Italian bank shares fell more than 4 percent.
Other high-grade euro zone government bonds dropped as investors retreated to the safety of higher-rated government debt.
Germany’s 10-year government bond yield, the benchmark for the region, was 4 basis points lower at 0.49 percent.
Additional reporting by AFP
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