Italy brushes off downgrade as it plans European Union budget response

Italy's Interior Minister Matteo Salvini gestures during a news conference with Prime Minister Giuseppe Conte after to approve a new decree of the measures on immigration and security at Chigi Palace in Rome Italy
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22 October, 2018

Italian sovereign debt yields hit fresh multi-year highs by the close of the week, as investors are growing increasingly cautious over lending to the anti-establishment Italian government. Its resolve to breach European Union fiscal rules will be put to the test as it faces a rebuke from the European Commission, downgrades by credit rating agencies and a market sell-off that could negate the very stimulus it is hoping for.

The standoff has flared up today, with several EU leaders openly criticising the Italian government over its austerity-busting budget, which contravenes European Commission rules imposed on deficits.

Despite efforts to shore up Italian banks' reserves, a downgrade by the ratings agency Moody's on Friday following a row between Rome and Brussels over the government's budget could send them into freefall again. He said the letter is not final and there is still time which should be "used productively" to continue to exchange views.

"The economic plans of the government, while supportive of growth in the near term, do not amount to a coherent programme of reforms that will lift Italy's mediocre growth performance on a sustained basis", it said.

He told a late-night talk show that the draft budget presented to President Sergio Mattarella's office contained a proposal to extend a tax amnesty on money held overseas and brought back to Italy.

Tria said the European Union and Italy have different views about the country's policies and he hoped "with dialogue" these views would "come closer together". It appears that Brussels has become increasingly anxious about fiscal deficits across the single currency area in the face of looming Brexit. Moody's said the Italian government's budget plans are raising concern over the sustainability of its national debt.

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"We'll explain", she said his deputy Prime minister, Luigi Di Maio, a leader of the Movement 5 stars (M5S, antisystème), while hammering: "there is no willingness to leave the euro zone and the european currency". It said Friday that it expects higher deficits than the government, at around 2.5 percent of GDP in each of the coming three years.

Brussels has demanded Italy cut spending and reduce its public deficit in order to pare down its debt pile.

He said he would visit EU Commission President Jean-Claude Juncker in the near future to discuss the issue.

An escalation is programmed in if Italy opts not to change its spending plans and sticks to its deficit target.

But the country's populist coalition government has done the opposite - offering a draft budget that boosted overall spending. "But what matters is not the sanction itself but the fact that there is a clear political conflict that the Commission can not and does not want to sweep under the carpet".


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