22/10/2018

22
Oct

Italy Calls for Dialogue on `Necessary’ Breach of Deficit Rules

Italy Calls for Dialogue on `Necessary’ Breach of Deficit Rules

By Kevin Costelloe and Lorenzo Totaro

(Bloomberg) — 

Italy’s populist government promised it won’t let its budget deficit widen further than currently planned and called for dialogue with the European Union to address their differences.

In a letter to the European Commission published Monday, Finance Minister Giovanni Tria said the government is ready to act to ensure it doesn’t exceed the 2.4 percent target for 2019. He said he’s aware that his spending plans don’t comply with EU rules and he wants “constructive” talks with officials in Brussels. Prime Minister Giuseppe Conte, speaking in Rome, said the deficit target should be seen as an upper limit and it could still be narrower.

Giovanni Tria

The decision to increase spending was “difficult though necessary,” Tria said in his letter. He cited slow economic growth and the “difficult economic situation the poorest segments of the Italian society are facing.”

Italian bonds rose slightly, with the spread over German 10-year yields narrowing by 6 basis points to 296. The gap reached a five-year high of 341 basis points during trading on Friday.

Tria has come under fire from officials and investors since bowing to pressure from Italy’s coalition heavyweights Matteo Salvini and Luigi Di Maio to allocate resources to their key election promises: tax cuts, more benefits spending, and a lower retirement age. The Commission expressed “serious concern” about Italy’s budget plans in a letter on Thursday.

Delayed Benefits

The finance chief offered no indication that he plans to back down from the headline spending targets, paving the way for the EU to take the unprecedented step of demanding revisions. EU commissioners will discuss the letter response at a meeting in Strasbourg Tuesday, commission spokesman Margaritis Schinastold reporters in Brussels.

“While recognizing the divergence of the respective evaluations, the Italian government will remain in a constructive and fair dialogue,” Tria added. “The government is confident it can get investment and GDP growth moving again and that the recent rise in the government bond yields will be reabsorbed as the investors learn about all the details of the measures in the budget law.”

He added that after 2019 the government doesn’t intend to raise the structural budget deficit — adjusted to take account of the economic cycle and one-time items.

Prime Minister Conte signaled that Italy may not implement some of its most controversial spending plans until later next year, which could potentially lead to a narrower deficit. While the move is unlikely to appease the EU Commission, it was a sign that the government in Rome is looking at ways to reach a face-saving compromise.

“We can still reassess during the budget implementation whether to contain the target so we don’t necessarily need to reach that 2.4 percent,” Conte said. “For sure, we won’t exceed it.”

 

22
Oct

Italy Refuses to Back Down on Budget Deficit in Response to EU

Italy Refuses to Back Down on Budget Deficit in Response to EU

By Kevin Costelloe and Lorenzo Totaro

(Bloomberg) — 

Italy’s government refused to back down on its budget targets in its reply to European Union criticism of its 2019 spending plans.

In a letter to the European Commission, Finance Minister Giovanni Tria said the government is aware that its plan is “not in line with the applicable norms” of the EU’s stability pact. The letter said if economic growth is better than expected, the structural-deficit targets may be revised.

Tria also said that the government will intervene should the deficit and debt ratios exceed what is targeted in the budget.

 

22
Oct

Euro may take lower path into ECB as Draghi to maintain rhetoric

Euro could revisit its year-to-date low as persistent political risks may lead Mario Draghi to refrain this week from painting a rosier picture for the bloc’s economy.Market dynamics have shifted only slightly since the European Central Bank’s last meeting, yet not in a supportive way for the common currency. Data may be suggesting the forecasts for growth are broadly on track with the Governing Council’s projections, but on the other hand subdued inflation, early signs of contagion in peripheral bonds, deadlocked Brexit negotiations and a hawkish Federal Reserve could mean the euro could test its $1.1301 mid-August low.

Draghi said he sees a “relatively vigorous” pickup in underlying euro-area inflation following the September monetary policy decision and while wage pressure is building, the pass-through to prices is yet to be seen. At a time when the market looks behind the curve when it comes to additional U.S. tightening, there may be little room for the ECB president to downplay monetary policy divergence projections at the next gathering on Oct. 25.

Price action in the spot market this month showed that the euro could benefit from a Brexit resolution. U.K. and EU officials keep kicking the can down the road however as obstacles remain, with focus now turning to a December EU summit, as volatility shows. European Council President Donald Tusk and European Commission President Jean-Claude Juncker present conclusions from the Oct. 18-19 summit to the EU Parliament this week, with the bar high for a positive surprise.

For the short-term, investors are looking closely at the performance of euro-
area peripheral bonds as the rift between Italy and the EU widens. Italy’s 10-year yield spread over Germany touched the highest in more than five years following a letter from the European Commission to Rome that said its spending plans were excessive. While resilience was the name of the game initially, Spanish bonds led the widening versus bunds on Thursday and the 10-year Portugal yield rose by 8 basis points Friday to 2.11 percent, highest since May.

The euro hit $1.1433 on Friday, flirting with a two-month low. Bloomberg’s fear-greed indicator shows bears are in firm control of price action, while a crossover in short-term moving averages suggests the latest rally for the dollar has legs to follow.

Leveraged names may be short the euro already, yet model names are seen selling technical breaks, according to two traders in Europe, who asked not to be identified because they are not authorized to speak publicly. As the market looks short gamma below $1.1400, further weakness for the common currency could mean traders will need to chase the market lower. As long as the euro stays below its 55-daily moving average, currently at $1.1579, bulls will be kept on their toes.

Source: MacauDailyTimes

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