Short-dated Italian government bonds sold off on Friday (3 August) for the second straight day on signs of deepening tension within the Italian government that is raising the prospect of new elections.
Ministers met on Friday morning to discuss Italy’s budget for next year as the government remains split about its spending plans.
Ahead of the meeting, Deputy Prime Minister Matteo Salvini said the budget would include tax cuts and pensions reform. Both moves would be likely to increase Italy’s large public debt unless balanced by corresponding spending cuts, which the government has so far not detailed.
“The (2019) budget will not include all planned measures immediately, but there will be the first steps towards a flat tax and a radical overhaul of the pensions system,” Salvini, who leads the right-wing League, said in a TV interview.
The ruling coalition, made up of the anti-establishment 5-Star Movement and the League, has pledged to cut taxes, roll back a 2011 pension reform that raised the minimum retirement age and boost welfare spending.
Economy Minister Giovanni Tria, a former economics professor who is not a member of either of the ruling parties, has repeatedly said the government will be cautious and will aim to reduce the huge public debt.
At 132% of national output, Italy’s debt is the highest in the euro zone after Greece’s.
Tria is under pressure from within the government to ramp up spending and challenge European Union budget rules.
However, the Minister has promised to coordinate tax and spending initiatives with the European Commission, which monitors how European Union member states comply with EU fiscal rules.
The possibility that he might be forced to resign has investors worried that Italy could go on a spending binge, or even that new elections could be triggered.
Italy’s two-year and five-year government bond yields rose 25 basis points at one stage to eight-week highs before settling at 1.11% and 2.18% respectively, higher about 14 bps each on the day.
Yields on 10-year bonds also rose, by 9 basis points, to hit 3% for the first time since June 11 before dipping slightly to 2.98%, and the closely watched spread over Germany was at its widest since late June at 255 bps.
Ministers attending the meeting include Tria, Foreign Minister Enzo Moavero, Industry and Labour Minister Luigi Di Maio, who leads the 5-Star Movement, and European Affairs Minister Paolo Savona, sources said.
Savona was the coalition’s original pick as economy minister, but was vetoed by the head of state because of his criticism of Italy’s participation in the euro.
He proposed last month that Italy should boost investments by about €50 billion and urged Brussels to back the plan instead of insisting on deficit reduction.
The coalition’s task is complicated by a faltering economy. Statistics bureau ISTAT said on Friday its composite leading indicator “continues to decline … signalling a continuation of the current phase of slowing economic growth.”