The Italian prime minister Giuseppe Conte committed to a “serious, rigorous, and courageous” 2019 budget on Wednesday, as Rome remains in a collision course with Brussels.
To discuss the budget, prime minister Conte is due to meet the two deputy prime ministers Luigi Di Maio, of the Five Star Movement (MS5) and Matteo Salvini of the Lega on Thursday.
Thus far, the Italian government remains committed to campaign promises to introduce a two-tier flat tax, a basic income of €720 for every citizen and decreasing the age of retirement.
The government has made clear that these structural reforms would boost growth but is willing to admit that it prioritises growth and social cohesion over the budget deficit.
If implemented to the letter, it is estimated that the Italian government’s program could cost additional spending to the tune of 5% of the GDP, undermining Italy’s debt profile. Italy is the second most indebted sovereign after Greece in the Eurozone with a 131% debt-to-GDP ratio.
All eyes are now on the Italian government, as it is unclear whether rhetoric translates into action. On September 27 Conte’s government is due to release its Economic and Financial document, that is, a precursor to the budget. A draft budget will be submitted to the European Commission on October 15, which may be rejected if it does not abide by the EU fiscal compact.
Meanwhile, sovereign bond yields for 10-year Italian bonds broke the 3% barrier last week, despite the European Central Banks’ bond-buying program, which ends in December 2018.
Markets are no looking at the decision of the two credit rating agencies Fitch, on August 31, Moody’s, on September 7, and Standard and Poors’ (S&P) on October 26. The S&P rating will reflect facts on the ground, but Fitch and Moody’s could potentially create “facts” that should be taken into consideration by the Italian government.
As long as markets estimate that Italy is too big to fail, Italy should be able to retain investment grade ratings. However, yields could surge significantly.