Italy returns to conventional economic approach, but markets still charge political risk premium

Italian premier Giuseppe Conte (L) and Italian Economy Minister Giovanni Tria (R) at the Lower House ahead of a confidence vote on the government's programme, in Rome, Italy, 06 June 2018. EPA-EFE/RICCARDO ANTIMIANI

Italy returns to conventional economic approach, but markets still charge political risk premium


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The Italian Economy Minister Giovanni Tria reiterated on June 19 that the new government remains committed to the objective of reducing Italy’s public debt, “but at a more limited pace than in 2017”.

Tria told the public news agency ANSA that the government now projects a 0.8% deficit in 2019, reaching a balanced budget by 2020, while adding that “serious inadequacies that characterise the current European institutional equilibrium,” markets continue to exert pressure on Italy, although “Quitaly” or “Italexit” is no longer considered an imminent threat.

The markets are looking closely at the 2019 budget that will be released in October and whether a series of economic policies promised during the campaign will make their way into the new government’s overall policy strategy. The Italian government has promised to introduce a €730 minimum wage, as well as a lowering of the retirement age and public investment.

The projected changes are expected to cost up to €100 billion, while the European Central Bank has announced that it will be gradually withdrawing its quantitative easing programme by December 2018. With a 130% debt-to-GDP, Italy may find it detrimental to balance more expensive borrowing and welfare expansion.

Italy’s spread on sovereign bonds is around 3,5%, although nominal yields are in the region of 2,2%. Premiums for Italian sovereign bonds, or Credit Default Swaps, are also rising in cost.

Concerns about a widespread capital flight from Italy still remain, as the Bank of Italy’s liabilities toward other Eurozone central banks hit a record high of €465 billion in May, according to Bloomberg.

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