Lagarde Puts Spotlight on Italy Spending Ahead of IMF Visit

(Bloomberg) -- International Monetary Fund Managing Director Christine Lagarde warned that financial markets could react violently to any fiscal loosening in large member states as the fund prepares for a mission to Italy.

“Financial markets’ very rapid reaction to anything that they perceive as fiscal easing or reversal of reforms” is among risks threatening the currency union, Lagarde said on Thursday in Luxembourg. “All we can observe at the moment is that markets are rather nervous and anxious to also have a good understanding of what the Italian policy mix will be going forward.”

The warning comes after investors started putting pressure on Italy’s debt again after two vocal euro-skeptics were elected to key posts in the nation’s parliament. Claudio Borghi, the new head of the budget committee in the lower chamber, said in an interview with Corriere della Sera on Friday that leaving the euro would solve many of Italy’s problems but there’s no majority for it among lawmakers.

The yield on Italy’s 10-year bond fell 6 basis points to to 2.67 percent on Friday after rising 18 basis points, the most in two weeks, on Thursday after the appointments. The benchmark FTSE MIB stock index gained 1 percent, rebounding from a 2 percent slide Thursday. Lagarde said an IMF team will visit Italy in two weeks to deliver its assessment of the country’s economy.

“We’re looking forward to meeting the authorities, to understanding exactly what their plans are for the moment,” she said. “We’re hearing some reassuring statements about fiscal discipline, declining debt trends.”

Finance Minister Giovanni Tria reaffirmed his government’s commitment to euro membership and tried to shrug off market concerns.

“In the government the euro is not up for debate,” Tria said on Thursday before a meeting of euro-area finance ministers. “I hope I’m not a scary person. It will be up to others to judge, but generally I am not.”

While saying he agreed with Tria, Five Star movement leader Luigi Di Maio reaffirmed the populist coalition’s spending plans.

“To really reduce debt we need to invest, to increase internal demand by creating a minimum guaranteed income, and to cut taxes,” he said. “If we manage to do this, debt will decline.”

Lagarde said that while euro-area growth has slowed down somewhat from its peak at the end of 2017, it remains “strong, broad-based and job-friendly.” Besides Italy, a protectionist spiral and a no-deal Brexit are the main risks for the region’s economy.

--With assistance from Nikos Chrysoloras, Viktoria Dendrinou, Alexander Weber, Birgit Jennen and Radoslav Tomek.

To contact the reporters on this story: Alessandro Speciale in Luxembourg at aspeciale@bloomberg.net;Joao Lima in Luxembourg at jlima1@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Alessandra Migliaccio, Richard Bravo

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