Church domes stand on the city skyline at dusk in Rome, Italy. (Photographer: Chris Ratcliffe/Bloomberg)

Italy Sees Peace Deal With EU as Commission Meets on Budget

(Bloomberg) -- Italy’s populist government is betting the European Commission will ratify an informal deal on Wednesday to avoid sanctions over its spending plans, after a long tussle which has roiled financial markets.

On the eve of a commissioners meeting in Brussels, a spokeswoman for the Rome Treasury, who asked not to be named, said the government has a technical agreement with EU officials which still needs to be approved.

An official in Prime Minister Giuseppe Conte’s office said they expect the commission to take a positive view of the country’s latest budget proposals, based on Conte’s conversations with Economic Affairs Commissioner Pierre Moscovici and Commission Vice President Valdis Dombrovskis.

Italian bonds rallied, with the two-year yield falling as much as 17 basis points to 0.38 percent, the lowest since May 28. The 10-year yield spread with similarly dated bonds, a barometer of investor sentiment, narrowed to 253 basis points.

Italy Sees Peace Deal With EU as Commission Meets on Budget

Conte and Finance Minister Giovanni Tria have long campaigned to persuade euroskeptic deputy premiers Matteo Salvini and Luigi Di Maio to rein in spending on their most expensive election promises -- a lower retirement age for Salvini’s anti-migration League, and welfare benefits for Di Maio’s anti-establishment Five Star Movement.

Avert Sanctions

Italy cut its deficit target for next year to 2.04 percent of GDP and shaved about 4 billion euros ($4.6 billion) off its spending plans in a bid to persuade the EU not to start the sanctions procedure this week. The Rome administration’s initial plan for a deficit of 2.4 percent was rejected by officials in Brussels because they ruled it was in breach of the EU’s budget rules.

German Chancellor Angela Merkel and French President Emmanuel Macron gave the Rome government a helping hand, warning northern European leaders that an “Italy risk” could spread to banks in all their countries, newspaper Corriere della Sera reported. Conte and Tria sent commissioners, at the latter’s demand, a letter late Tuesday detailing measures to cut deficit spending and thus reduce debt, according to La Repubblica.

The deal will be officially announced Wednesday, the Italian Treasury official said. The EU is due to explain the result of its discussions around midday after the commissioners meet in Brussels.

Final Phase

During the final phase of the talks, Tria has been trying to convince the EU’s budget inspectors that its 2019 spending plan will really deliver on its deficit projections. Analysis by the European Commission last month suggested that the deficit would actually be close to 3 percent.

Once a deal is formally announced, the government will face a year-end deadline to get the bill through parliamentary approval. The budget bill is expected to be debated by the Senate from Thursday, with approval needed both in the upper house and in the lower house.

Even with an accord with Brussels, Italy’s economic prospects are still a source for concern for investors. The budget doesn’t address the country’s long-term problem of lower productivity and growth, Bruno Rovelli, Chief Investment Strategist for BlackRock Italia, told reporters in Milan on Tuesday.

“The medium-long term scenario remains complicated,” Rovelli said. “The real issue is not the budget for 2019 but what happens in 2020, 2021.” BlackRock is keeping a cautious strategic view on Italian assets which it has held for more than a year. Investors are still unclear on the government’s real commitment to fiscal discipline, Rovelli added.

©2018 Bloomberg L.P.