Highly indebted Italy has triggered turbulence in the markets and contradictions among its EU partners with its announcement of new debt. Over the next three years, the deficit will amount to 2.4 percent of economic output.
The Italian government bonds then rushed into the cellar. The responsible EU Commission has signaled that it does not approve of the plans from Rome. Meanwhile, Italy’s Finance Minister Giovanni Tria is standing with his back to the wall.
With around 130 percent of its economic output, Italy is in such higher debt than any other industrialized country and has therefore been under pressure from Brussels to reduce debt for years. According to the jointly agreed so-called Maastricht criteria, a maximum of 60 percent is allowed. The previous government had therefore sought to reduce the deficit in the coming year to 0.8 percent of gross domestic product.
According to the plans of the coalition of populist five-star movement and right Lega now be spent including 10 billion euros for the introduction of a civic income, the government also plans an increase in minimum pensions and a previous retirement.
In addition, a “flat tax” will be introduced step by step, from which initially small businesses should profit. 1.5 billion are to flow into a fund for the compensation of small investors who have lost their savings in the wake of bank failures. The full draft budget must be sent to the EU Commission in Brussels by 15 October. This must then examine the plans in detail.
Italy’s sovereign debt fell sharply on Friday, while government bond yields rose sharply. For the first time since the beginning of September, the yield on ten-year government bonds again climbed above 3 percent – by 0.22 percentage points to 3.10 percent. Observers spoke of an unusually violent price reaction for the bond market.
The new debt plans pushed the leading index FTSE MIB on the Milan stock exchange. In the meantime, the stock market barometer had even slumped by 4.65 percent – this was the largest percentage loss since the British vote to opt out of the European Union.
There were also strong losses in the banking stocks. In Germany, too, bank papers came under pressure in the face of news from Italy. Deutsche Bank shares lost 2.6 percent at the end of the Dax. Commerzbank shares lost 4 percent, putting them in the bottom of the MDax.
Due to Italy’s “explosive” public debt, clear words came from EU Economic Affairs Commissioner Pierre Moscovici. Rome’s plans amounted to a budget that “today seems beyond the bounds of our rules,” said the French socialist. It was unlikely that the budget could be so accepted, it said in Brussels. The Italian daily La Repubblica saw in the announcements by Luigi Di Maio, Matteo Salvini & Co even a “slap in the face” for Brussels.
The Italian government is also booming. According to media reports, the non-party Finance Minister Giovanni Tria has considered his resignation. However, President Sergio Mattarella is said to have prevented him from doing so. A high level of new debt in combination with the resignation of the guarantor for budget discipline would have made the country’s financial situation “unpredictable”, wrote the business paper “Il Sole 24 Ore”.
Nevertheless, Tria emerges as loser from the negotiations. He could not prevail with limiting the new debt to 1.6 percent. The meeting of euro finance ministers this coming Monday in Luxembourg should therefore give some unpleasant questions for him.