Italy's Economy Entering A Crucial Period In Its Euro Membership

“The unifying factor in the Italian coalition of two disparate political parties is firm agreement on the flaws of the EU’s deficit limits, and the risk is that any conciliation with the EU fronted by the Minister of Economy and Finances Giovanni Tria may amount to nothing more than political expedience,” commented today Neil Mellor Senior Currency Strategist at BNY Mellon. Moreover, he adds that the government’s resolve to raise spending has only “stiffened” since the Genoa bridge disaster and the decision by Fitch to downgrade Italy’s outlook.

Five Star chief Luigi Di Maio said on Sunday, “ We can’t think about listening to the ratings agencies and reassuring the markets, and then stab Italians in the back ”. And although newswires also filed reports of League leader Matteo Salvini’s promise to abide by EU deficit limits – as he did once again this morning according to Reuters – The Telegraph claims this assurance was delivered with a deliberately ironic tone that invoked laughter in the audience.

Either way, Neil Mellor believes that notwithstanding “a (genuine) Damascene moment on the budget”, pressures on the Italian government securities BTPs are in any case destined to grow.

With the ECB airing concerns about unhedged Turkish borrowers , it stands to reason that the TRY’s renewed weakening is a pressure point for Italy’s €18 Bn worth of exposure.

Signs that the Italian economy is also perilously close to stalling can only serve to enfeeble the country’s debt dynamics, already rather inadequate given the prevalence of modest growth projections for 2019 and beyond. And suffice to say that this low growth is anathema for a banking sector still nursing 25% of the EU’s bad loans.

But of course, according to BNY Mellon, the biggest issue for the BTP market is the ECB’s looming plans to unwind QE.

Whether or not Italy has asked the ECB consider an extension to its programs, the central bank’s silence on the matter rather implies that its position has not changed – a position that was first laid out by Peter Praet in an interview with Der Spiegel last year: essentially, “ Italy is on its own”.

Or is it? This is the question that hangs over the market – as does the response from the Euro-zone’s creditor states were the ECB’s hand forced by contagion across the Euro- zone sovereign space. The final complication is that amid this uncertainty, the Italian government has to go to market, as it has less than three months to raise the bulk of its remaining annual financing needs (around €6 Bn in fresh debt).

Hence, unless the US is to come to Italy’s rescue, the country is clearly entering a crucial period in its Euro membership.