Italian government forced to tighten budget plans in face of market alarm

‘The deficit will increase compared with the previous forecast in 2019, but then there will be a gradual reduction in the following years,’ said the economy minister Giovanni Tria

Mr Tria was speaking to an audience of industrialists in the Italian capital (AFP/Getty)

Italy’s economy minister was forced to announce that the country’s deficit will come down after all on Wednesday in order to calm frightened debt investors and to forestall a potential reopening of the eurozone crisis.

Italian 10-year bond yields have spiked to their highest levels in more than four years in the wake of the populist coalition government’s announcement last week that it would jack up its domestic spending next year, sending the budget deficit up to 2.4 per cent of GDP over the next three years.

That set up the possibility of an explosive confrontation with the rest of the eurozone, which has rules to keep member states’ borrowing within tight bounds.

But Giovanni Tria, the economy minister, said the deficit would fall “gradually” from 2020, rather than remaining stable, confirming media overnight reports of a softening of the stance of the Five Star/League government in Rome.

“The deficit will increase compared with the previous forecast in 2019, but then there will be a gradual reduction in the following years,” Mr Tria told an audience of industrialists in the Italian capital.

He also said the government would ensure Italy’s high public debt to GDP ratio would decline over the coming years.

Italian 10-year bond yields jumped as high as 3.46 per cent this week after last week’s budget announcement, the highest since 2014. In 2011, they peaked at 7.5 per cent as it looked like Italy might be forced out of the single currency.

The president of the European Commission drew parallels on Monday between Italy’s budget proposals and those of Greece, which came within a hair’s breadth of crashing out of the single currency in 2015.

Market alarm

But yields subsided on Wednesday to 3.375 per cent, down 10 basis points on the day, as investors responded to the moderation of the government’s stance.

The Italian stock market was also up 1.1 per cent on the day, clawing back some of the 3.72 per cent slide last Friday following the original budget announcement.

“The deficit forecast news is the main reason markets are doing what they are doing today,” said Mathias van der Jeugt of KBC Bank.

“But this is too little to bridge the gap between the EU and Italy. We might get some more relief, but I think it will be short-lived unless Italy comes up with a better proposal that is more aligned with what the EU wants.”