Italian debt is on fire today, enjoying one of its best intraday returns on record, with the 30Y Italian bond yield plunging by a whopping 27bps to 2.595%, 10Y yields sliding as low as 1.61%,the lowest since October 2016, and the spread to German Bunds collapsing below 200bps for the first time since May 2018…
… after the European Commission decided to avoid disciplinary action against Italy over its soaring debt and growing deficit, after the government in Rome offered fresh promises that address some of Brussels’ concerns.
“The commission has concluded that a debt-based Excessive Deficit Procedure for Italy is no longer warranted at this stage,” Economic Affairs Commissioner Pierre Moscovici told reporters in Brussels on Wednesday after a meeting of the European Union’s executive arm.
However, in a repeat of 2018’s budget fiasco Moscovici added that “we will need to continue to monitor Italy’s budgetary execution very closely in the second half of this year,” citing the assessment of the 2020 budgetary plan due mid-October.
As Bloomberg notes, the commission’s decision marks a significant detente between Italy and the EU after a months-long tussle over the country’s debt mountain. The two sides had clashed over fiscal policy since the Italian populist government took power last year. While Brussels has wanted swift action to cut Italy’s debt load, the second-biggest in the euro area, Rome has argued that its fiscal targets meet EU rules and that it needs to cut its deficit slowly to jumpstart the economy after years of stagnation.
In the end, Rome had an ingenious solution: just make up what the deficit number would be, shrinking it until Brussels no longer objected.
As a reminder, last month the commission escalated tensions when it said the situation warranted a disciplinary procedure, triggering fresh negotiations to reach a compromise on Italy’s budget targets for this year and next.
Then, in a deus ex moment, on Monday evening, Italy’s cabinet agreed the deficit would fall by 7.6 billion euros this year thanks to higher revenue and lower spending — including 1.5 billion euros previously set aside for social programs for which demand has been lower than expected. How that will every happen in real life, well, nobody discussed that or even watned to broach the topic.
As a result, with the EU withholding punitive action against Rome, Italy should be able to respect its commitment that the budget deficit for 2019 would be at 2.04% of output. Of course, it will be far higher, but that will be in 2020 at which point the entire farce can be repeated.
In a last ditch effort to avoid EU sanctions, Italy’s Finance Minister Giovanni Tria and Prime Minister Giuseppe Conte sought to reassure Brussels that the government’s commitment to fiscal discipline will extend beyond this year into 2020. What’s funnier is that the EU actually “believed” them.
But what is most entertaining is that everyone knows that Italy is lying and the Brussels is happy to accept Italy’s lies, just to avoid another tantrum in Europe’s bond market.
“You need to be conscious of the fact that the populist government wants to keep on spending and at the same time they want to stay in government,” Davide Serra, chief executive officer of Algebris Investments, said in a Bloomberg TV interview on Tuesday.
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Author: Tyler Durden