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London | The clash between Rome and Brussels over the extent of Italy's budget deficit is expected to peak this week, in a momentum that has scared investors and resulted in a deterioration of the credit ratings of the fourth European economy.
The Italian government has until Monday to react to a easing on the part of the European Commission last Thursday over its plan to increase spending and reduce taxes, supported by what Brussels sees as forecasts of growth too optimistic.
The Italian cabinet held an emergency meeting on Sunday (AEDT) to discuss its response to the EC, which accused the government of violating the euro area budget deficit and debt thresholds set by the Stability Pact. and growth.
While government leaders were provocative on Friday, some media reports over the weekend hinted that Rome could propose an olive branch to avoid triggering a formal censorship process.
The European Commissioner for Financial Affairs, Pierre Moscovici, is asking about Italy's growth forecasts and the sustainability of its public debt. Gustavo Garello
The stalemate continued to destabilize the markets. The main Italian stock index, the FTSE MIB, closed on Friday at 19,080.16, down 0.9% over the week. During the day, it dropped to 18,754.24, a depth unprecedented since February of last year. The index is down nearly a quarter since its most recent peak in May.
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The 10-year Italian bond yield rose to 3.71% on Friday, bringing the spread to German bonds to 329 basis points, the highest level in five years.
Last Friday, Moody's Investors Service lowered its credit rating for Italy by one notch to Baa3, the lowest credit rating.
"The government's economic plans – while supporting short-term growth – are not a coherent program of reforms that will sustainably improve Italy's poor growth performance," said the rating agency.
Moody's also said that Italy's public debt – which, with 130.9% of GDP, was second only to Greece – "makes Italy vulnerable to future shocks. internal or external origin, especially to lower economic growth ".
On Friday this week, Standard & Poor will release an update of its rating, which is only two notches above the order. Fitch Ratings revised its outlook for Italy from "stable" to "negative" in September; It is not expected that he will review his rating again this year, but said on Friday that the fall in the price of Italian government bonds was a risk for Italian banks.
The EC wants Italy to tighten its structural budget deficit in order to avoid a debt collapse. But the Rome plan for an overall budget deficit of 2.4% in 2019 would actually widen the structural deficit, to the extent that the EC has described it as "unprecedented in the history of the Stability and Growth Pact". .
The commissioners also share the skepticism of the Italian Parliamentary Budget Office regarding the government's forecast of 1.5% economic growth for 2019.
Although Brussels is speaking hard, in reality, the EC lacks strength and its process is slow. If Italy remains closed Monday, the EC will issue what is called a "formal notice". This would give Rome three weeks to develop a new budget plan. If Italy still holds out, Brussels may launch an "excessive deficit procedure", which could recommend penalties of up to 0.2% of production.
The 19 euro area finance ministers will meet on 3 December and will consider any EC recommendation on sanctions. But if they return to Rome for more information, it could tip the scales in place next year. And even in this case, Italy would have three to six months to comply with it. And if the Italians were still not in order, this would only launch an additional process of three to six months before sanctions are actually applied.
The EC process could even last longer than the Italian coalition, which is far from stable. One of the main reasons for Saturday's cabinet meeting was to end a coalition quarrel over an amnesty proposal for financial crimes such as tax evasion and money laundering. ;money. The left five-star player thinks it's going too far and accuses the right Lega of making them want to follow him.
"They have two completely different programs – one is business-friendly and north of the country, the other south-east," said Mike Rann, CEO of Rann Strategy Group and former ambassador of the United States. Australia in Italy. "The question is how long can this last or there will be an election and consolidation of the center-right."
On the budget, the Italian Finance Minister, Giovanni Tria, left the door open for negotiations with the EC. But Friday, Prime Minister Giuseppe Conte said that "the longer we go, the more I am convinced that the Italian budget is very beautiful".
At the same time, Dutch Prime Minister Mark Rutte publicly urged the EC to continue playing hard.
Not all observers are convinced that Brussels is on the right track. "You can advocate for a focused stimulus in southern Europe, but Germany does not understand that," said Jacob Mitchell, director of investments at Antipodes Partners.
"Everyone will say that the public debt is extreme and that even though it is superior to the United States, Italy still has a primary surplus, which is not the case in the United States. is a bit unfair to focus on a leverage element and this is the speed at which debt is accumulating: in this sense, Italy is not at the top of our watch list of extreme risks. "
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