The Italian government is trying to appease opposition at home for the revised 2019 budget that was given the stamp of approval by the European Commission passed through the Italian Senate just prior to the Christmas holiday after a marathon session of often tense negotiations between the ruling anti-austerity Lega (League) and Five-Star Alliance government and the pro-EU opposition.
By reaching an agreement with the European Commission, the Italian government averted being subject to an infringement procedure that carries a fine of up to 0.2% of the country’s GDP.
The bill sees Italy running a deficit of 2.04% next year, down from the original target of 2.4%. In policy terms, this means that the government will go forward with a guaranteed minimum income for all Italian citizens but will not increase pensions in line with inflation.
Officially, the bonds of Eurozone members are regarded as “zero” risk, allowing lenders to use them as core assets in the assessment of their credit profile. This exposes them to risks as government volatility directly affects the financial system.
Danièle Nouy, the Eurozone’s outgoing banking regulator, believes that not all Eurozone bonds should continue to receive the same risk rating, thereby allowing lenders to differentiate their assets and bolster the resilience of the banking system, all of which is in line with Bundesbank demands to limit the number of government bonds of their own government any lender must hold.
This move will narrow the market for government bonds of highly indebted countries, including Italy. Italian lenders currently hold €387 billion of Italian sovereign debt.