Thursday 14 November 2019

Italian assets calmer on prospect of budget deal

European Commission vice-president Valdis Dombrovskis said Italy broke rules. Photo: Jason Alden/Bloomberg
European Commission vice-president Valdis Dombrovskis said Italy broke rules. Photo: Jason Alden/Bloomberg

John Ainger and Stephen Spratt

Italian markets got some respite after a report that the government had bowed to pressure from the EU to trim its budget-deficit target.

Italian government bonds snapped four days of declines and the FTSE MIB Index of shares headed for the biggest gain in more than a week after the 'Corriere della Sera' newspaper reported that the government will seek to contain the shortfall at 2pc in 2021, down from 2.4pc.

The target for 2020 will be trimmed to 2.2pc, while next year's goal of 2.4pc will remain, the newspaper said.

Markets have struggled to find an equilibrium for Italian debt following the original plan outlined last week, with 10-year yields touching the highest level in more than four years on Tuesday. The Five Star Movement-League coalition still needs to release its economic-growth projections before presenting a draft budget proposal to the EU Commission by October 15. A number of officials have warned that the plans could be in breach of EU rules.

"The re-profiling of the deficit path is a constructive response and suggests some reduction in tail risks," said Peter Chatwell, head of Mizuho International.

"For the sake of the Italian economy, we hope this signals that a lesson has been learned." Italy's 10-year yields dropped eight basis points to 3.37pc by midday in London, narrowing the yield premium on the nation's bonds over those of Germany.

Italy conducted a bond swap yesterday, exchanging notes maturing in 2019 and 2020 for €2.1bn of securities due in 2028.

The EU's response to the revised targets will still be a key hurdle for investors. The original plan from Rome had prompted a push-back, with the European Commission vice-president Valdis Dombrovskis saying that it went "substantially beyond" what is allowed. Moody's and S&P Global Ratings have Italy just two notches above junk and are due to review the sovereign rating later this month.

Finance Minister Giovanni Tria said at an event in Rome that the government was committed to ensuring constant debt reduction toward the objective agreed with the EU.

Meanwhile, Italy's fledgling government received a boost after a record $7.6bn sale of high-speed airwaves, which could help it fund some of its election promises.



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