Italy sends mixed signals to jittery markets after debt downgrade

Luigi di Maio, leader of anti-establishment 5-Star Movement (M5S), celebrates in front of the Chamber of deputies in Rome, Italy, 12 July 2018. [EPA-EFE/Massimo Percossi]

Italy’s new anti-establishment government sent contradictory signals to financial markets on Sunday (2 September) amid increasing concern Rome could breach EU spending limits as it comes under pressure to fulfil its anti-austerity electoral promises.

With Italy’s debt currently standing at a whopping 132% of output, financial markets appear to be increasingly nervous about the ability of the new populist government to get its finances under control.

Fitch on Friday changed the outlook on the world’s third-largest pile of state borrowing to “negative” from “stable”, citing concerns about the government’s “new and untested nature” and its promises to hike spending.

“Following the formation of the country’s new coalition government, (Fitch) expects a degree of fiscal loosening that would leave Italy’s very high level of public debt more exposed to potential shocks,” the rating agency said in a report.

On Friday, the so-called “yield spread” – which measures the difference in perceived risk between Italian and ultra-safe German government bonds – was wider than it has been in the past 12 months.

Italy's economy minister: Lower growth, higher deficit next year

Italy on Wednesday (8 August) cut its forecasts for economic growth and said the country’s public deficit this year and in 2019 would be larger than previously forecast, potentially lining it up for a clash with Brussels.

“Italy isn’t the sick man of Europe,” says finance minister

Economy Minister Giovanni Tria responded reassuringly on Saturday, saying Italy would respect its European Union budget commitments with concrete policy choices in coming weeks.

“Italy isn’t fragile. It isn’t the sick man of Europe,” Tria said in an interview with La Repubblica newspaper on Sunday (2 September).

“The government has already said several times that budget stability will be respected. And with the new budget law in the coming weeks, these intentions will be translated into action,” the minister said, in comments made during a visit to China.

“As a result, the spread will narrow.”

Di Maio: Italians come before ratings agencies

But Tria was contradicted on the same day by Deputy Prime Minister Luigi Di Maio, the leader of the 5-Star Movement, who promised to follow through on his party’s main campaign pledge – a universal income for the poor.

“In 2019 the universal income must get started,” Di Maio said at a conference on the Tuscan coast. “We have to put the financing in the budget so that at least 5 million impoverished Italians can get back to work.”

Di Maio said unlike previous governments, the alliance made up of 5-Star and the far-right League party, which took office in June, would answer to citizens before ratings agencies.

“We can’t think about listening to the ratings agencies and reassuring the markets, and then stab Italians in the back,” he said. “We’ll always choose Italians first.”

By the end of the month, Italy must unveil its growth and public finance targets, and its budget outline must be approved by the end of October.

The government has said it will seek budget leeway from Brussels, but relations have soured recently over immigration, with Di Maio even threatening to veto the bloc’s next seven-year budget if the EU does not should more of the burden.

Italy threatens to veto EU's long-term budget over migration crisis

Italy’s Deputy Prime Minister Luigi Di Maio on Monday (27 August) threatened to veto the European Union’s seven-year budget plan should the bloc not do more to share the burden of migrant arrivals.

Italian debt downgraded from “stable” to “negative”

Meanwhile, international rating agencies appear sceptical.

On Friday, Fitch lowered its outlook on Italy’s sovereign debt rating from “stable” to “negative”, meaning that it could be downgraded in the future.

“The risk of a reversal of structural reforms negatively impacting Italy’s credit fundamentals has increased somewhat, in our view,” Fitch said. “Fiscal and other policy risks are compounded by the relatively high degree of political uncertainty.”

On Friday, EU Economic and Monetary Affairs Commissioner Pierre Moscovici, also urged Rome to make a “significant effort” on its 2019 budget, warning he expected talks with the government to be difficult.

Eurosceptic minister: Italy needs to be ready for ‘all eventualities’ on euro

European Affairs Minister Paolo Savona said yesterday (10 July) that Italy had to be ready for “all eventualities” regarding its membership of the eurozone, which might depend on factors outside its control.

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