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Italy stocks and bonds sell-off after budget agreement

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Italy flag
Italian is
rebelling.

Reuters/Tony
Gentile



  • Italian assets sold-off after coalition parties there
    agree a deal to significantly increase the budget
    deficit.
  • The coalition late on Thursday said they had agreed to
    set Italy’s budget deficit at 2.4% of GDP.
  • This is far above the 1.6% level that technocratic
    finance minister Giovanni Tria had lobbied for, and puts Italy
    on a collision course with the EU.
  • The benchmark FTSE MIB share index lost 2.4%, while
    10-year bond yields spiked above 3%.

Markets in Italy are selling off sharply on Friday after the
country’s government agreed plans to sharply increase its budget
deficit over the coming year, going against both the European
Union and the wishes of the country’s finance minister.

On Thursday night, six months after the government’s ascent to
power,
Italy’s populist coalition government of the Five Star Movement
and the Northern League
finally agreed on the key tenets of
its first budget.

The coalition said in a statement they had agreed to set Italy’s
budget deficit at 2.4% of GDP, an increase on the current level
and far above the 1.6% that technocratic finance minister
Giovanni Tria had lobbied for.

Five Star and the League have been at loggerheads with finance
minister Tria, who is independent of both parties, since his
appointment. The populists want to increase spending, and
therefore debt, while Tria wants to pursue a more fiscally
responsible strategy aimed at cutting Italy’s sizeable debt pile.

Italy
already has a national debt bigger than its GDP.
Plans to
allow a larger budget deficit will likely see that debt increase
further, something Tria believes puts Italy at risk of breaking
EU budget rules. The EU’s fiscal responsibility rules forbid
countries from having a budget deficit of more than 3% of GDP in
any given year.

The rest of the budget is yet to be announced, but the government
is expected to announce plans for heavy spending on
infrastructure, social welfare projects, and tax cuts.

Infrastructure is a particular concern for the government
following the collapse of a motorway bridge in Genoa in August, a
tragedy that killed 42 people.

Five Star and the League’s agreement on an increased deficit
level has not been well received in markets. Italian stocks sold
off sharply and yields on Italian government debt spiked higher
on Friday morning.

As of 9.00 a.m. BST (4.00 a.m. ET), an hour after the start of
trading, the
benchmark FTSE MIB stock index
— which tracks the shares of
Italy’s 40 most traded companies — is down close to 2.5%.

Bank stocks, in particular, are taking a hammering. The biggest
losers on the MIB are all banking stocks. Banco BPM is down by
more than 6.7%, while UniCredit, Italy’s biggest bank, has shed
more than 5% of its value.

Bond markets are also suffering. The yield on the benchmark
10-year Italian bond jumped in Friday morning trading. Yields
move inversely to price, with a higher yield reflecting an
increased premium to hold the bond. The 10-year yield hit 3.164%
in early morning trade, close to a high last seen at the start of
September.

“The markets had been waiting patiently to see what spending
plans the Italian government were going to pull together. But the
plan put forward is confirming investors’ fears, with a standoff
in Brussels almost certain,” Jasper Lawler, head of research at
London Capital Group, said in an email on Friday morning.

Even prior to Friday’s sell-off, investors had moved away from
Italy in droves in 2018, with research from Barclays earlier in
the week showing major outflows from Italian ETFs. The move
reflects partially fears about Italy’s political situation, and
also a weaker euro.

“European equities have also moved with the currency, and have
already seen significant outflows this year, as the euro rolled
over sharply,” Barclays said.

“Within Eurozone, Italian ETFs especially have seen huge outflows
year to date.”Screen Shot 2018 09 28 at 09.21.42Barclays

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