September 28, 2018 / 6:10 AM / 22 days ago

Reaction to Italian budget targets

MILAN (Reuters) - Italy’s government has targeted a budget deficit of 2.4 percent of gross domestic product for the next three years, defying Brussels and marking a victory for ruling-party chiefs over Economy Minister Giovanni Tria.

The euro initially slumped on the news overnight on Thursday before recovering ground.

Below are some reactions:

NICOLA NOBILE, ECONOMIST, OXFORD ECONOMICS

“With a deficit at 2.4 percent of GDP the public debt will not fall, at best it will stabilize, assuming a nominal GDP growth rate of 2.5 percent. What’s worrying is that the deficit is seen at 2.4 percent for three years in a row. It makes Italy vulnerable to any change in sentiment and the economic cycle. The other issue to be underlined is the loss of credibility for Economy Minister Tria. I don’t think the European Commission will be able to ignore it: Italy is breaching the rules on both the debt and the structural deficit.”

MARTIN VAN VLIET, RATES SPECIALIST, ING

“The 2.4 percent target is not consistent with an improvement in the structural budget balance and hence they seem to be on a collision course with Brussels. And moreover for me the key issue is what they assume on the budget beyond 2019. They are seemingly leaving the path of fiscal consolidation and that may not sit well with ratings agencies. It’s premature to speculate on what exactly is going to happen as this is a preliminary draft, but I do understand why the markets are taking a cautious stance on this.”

GILLES GUIBOUT, PORTFOLIO MANAGER, AXA IM

“It’s clearly not a good sign given that the deficit number is higher than expected. All the attention will now shift to rating agencies. Meanwhile, it’s difficult to imagine that Italian stocks will perform well.”

PETER CHATWELL, HEAD OF RATES, MIZUHO

“We see potential for the 10-year BTP-Bund spread to reach 300 basis points over the coming two weeks - albeit being capped there due to Tria remaining on board. For the time being there is little positive to say about the budget, relative to expectations. We expect investors will not see the growth impulse of this budget yet, instead focusing on the extra supply and, more importantly, the likely headbutting against the EU.

What is crucial next is the first glimpse of a reaction from the European Commission. If there are signs of being able to work with this size of deficit, which will require them to upgrade their growth forecast on the basis of the fiscal impulse, then there could be market positive outcomes.”

CHRISTOPH RIEGER, RATES STRATEGIST, COMMERZBANK

“The budget compromise has a bad taste to it. Clearly, the 5-Star Movement is the winner. It makes clear what the balance of power is within the government - namely that Tria has been overruled. It leaves him damaged. It seems clear that he is just staying as finance minister to avoid chaos, but that’s not a very good basis for future fiscal policy. For that reason we have closed our long Italy bias last night which we have had in place since late August.”

ARNE PETIMEZAS, ANALYST, AFS GROUP

“2.4 percent leaves a primary (budget) surplus of about 1 percent of GDP, possibly closer to 0.5 percent if growth, inflation or interest rates disappoint. All in all, that should slowly push down the debt-to-GDP ratio by 1 percentage point or less annually. Given the maturity of the cycle and Italy’s high debt load, it certainly isn’t pretty. Furthermore, the so-called structural deficit ... is probably going to get even worse. And it was already in violation of the EU’s fiscal compact. In any case, given the wild (post-)election promises, 2.4 percent of GDP is still very moderate, and up only slightly from last year’s 2.3 percent.”

JASPER LAWLER, HEAD OF RESEARCH, LONDON CAPITAL GROUP

“The euro is remaining resilient in early trade. This means the markets are seeing this as a domestic issue right now, rather than something that is an immediate risk to the euro zone region. There is still scope for political jitters to hit sentiment for the euro as the day progresses.”

ROBERTO LOTTICI, FUND MANAGER, IFIGEST

“I was expecting something more reasonable but we didn’t get it. I thought Tria was a bulwark but he wasn’t and probably stayed on in reply to (Italian President Sergio) Mattarella’s request to avoid market turbulence.”

ALESSANDRO BALSOTTI, FUND MANAGER, JCI CAPITAL

“The 2.4 percent figure is for sure at the top end of expectations after swinging in the last six weeks from fears of touching or exceeding 3 percent to the unexpectedly more sober 1.6 percent, and recently zoning in on a possible compromise of around 2 percent. Let’s see today if a number that could send us on a collision course with Europe prompts further losses. Or whether the (bond) auction of yesterday can represent a real sign of demand.”

Reporting by Milan newsroom; Editing by Mark Bendeich and Janet Lawrence

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