London | The dispatch between Rome and Brussels over the size of Italy’s budget deficit is supposed to be settled this week, in a stoush that has spoked investors and led to a write-down of credit ratings for Europe’s fourth largest economy.
The Italian government has until Monday to respond to a disguise from the European Commission yesterday last Thursday about its plan to increase spending and reduce taxes, based on what Brussels considers as overoptimistic growth forecasts.
Italy’s cabinet held an emergency meeting on Sunday (AEDT) to discuss its response to the EC, which has accused the government of breaking the euro area budget deficit and debt limits laid down in the Stability and Growth Pact.
While the leaders were sad on Friday, some press releases presented this weekend. Rome can offer an olive branch to avoid interrupting a formal censorship process.
European Commissioner for Finance Pierre Moscovici questions Italy’s forecasts and sustainability in public debt.
Standoff has continued to ruin markets. Italy’s largest equity index, FTSE MIB, closed on Friday 19,080.16, down 0.9 percent during the week. During the day it fell as low as 18,754.24, a depth not seen since February last year. The index is down almost a quarter since its last peak in May.
The Italian 10-year bond yield rose to 3.71 percent during the Friday, spreading German bonds by 329 points, the highest in five years.
Another issue came on Friday when Moody’s Investors Service lowered its rating for Italy a distortion to Baa3, the lowest investment rate.
“The government’s economic plans – based on short-term growth – do not constitute a coherent program of reforms that will sustain Italy’s mediocre growth performance in a sustainable way,” said the credit rating agency.
Moody’s also said Italy’s public debt – which at 130.9 percent of GDP is other than Greece – “making Italy exposed to future domestic or external due to weaker economic growth.”
On Friday of the week, Standard & Poor is due to issue an update of Fitch Ratings revised its view of Italy from “stable” to “negative” in September, and is not expected to return its rating again this year, but on Friday said the falling price of Italian government bonds was a risk to Italian banks.
EC wants Italy to limit its structural budget deficit to avoid blaming out. But Rome s plan for a surplus of 2.4 percent budget deficit in 2019 would actually increase the structural deficit, to the extent that the EC said “was never before seen in the Stability and Growth Pact”.
Commissioners also share The Italian Parliament’s budget office is skeptical about the government’s forecast of 1.5 percent economic growth for 2019.
Although Brussels talks tough, the EC lacks teeth and the process is slow. If Italy is stuck on Monday, the EC can issue what is called a “formal opinion”. This would give Rome three weeks to prepare a new financial plan. If Italy is still on, Brussels can initiate an excessive deficit procedure, which could recommend penalties of up to 0.2 percent of production.
The 19 euro area finance ministers will meet on December 3, and should consider possible EC sanctions recommendations. But if they return to Rome for more information, it may enter next year. And even then Italy would have three to six months to follow. And if the Italians were still inadequate, it only kicks a three to six month process before any sanctions would be applied.
The EC process could even surpass the Italian coalition, which is far from stable. One of the main reasons for Saturday’s meeting was to iron out a coalition that sprang over a proposed amnesty for financial crimes such as tax evasion and money laundering. The left-leaning five-star thinks it goes too far and accuses the right-sloping Leg of Hoodwinking of them to join.
“They have two completely different agendas: one is pros and one’s north and the other is well-being and in the south,” says Mike Rann, CEO of Rann Strategy Group and a former Australian ambassador in Italy. “The question is how long it may last, or whether it will be a choice and a mid-right consolidation.”
On the budget, Italian finance minister Giovanni Tria left the door open for negotiations with the EC. But on Friday, Prime Minister Giuseppe Conte said that “the more time, the more I am convinced that the Italian budget is very beautiful.”
At the same time, Dutch Prime Minister Mark Rutte has urged the EU to continue playing hard ball.
Not all observers are sure that Brussels is on the right track. “You can argue for targeted stimulants in Southern Europe, but Germany can not get its head around it,” says Jacob Mitchell, Investment Manager at Antipodes Partners.
“Everyone will say that the central government debt is extreme and at the same time it’s higher than the United States, Italy still has a primary surplus, which is not the US. It’s a bit unfair to focus on an element of leverage, the leverage in Italy is low . And that’s the speed at which leverage is accumulated. That’s what Italy is not at the top of our risk list. “