Italian Markets Find Relief After Budget-Deficit Concessions

(Bloomberg) -- Italian markets got some respite after a report that the government bowed to pressure from the European Union to trim its budget-deficit target.

Government bonds snapped four days of declines and the FTSE MIB Index of shares rallied on assurances that the administration will seek to reduce last week’s proposed fiscal shortfall for 2020 and 2021. Deputy Prime Minister Luigi Di Maio confirmed that next year’s target of 2.4 percent would remain.

Separately, an outline of the budget will be presented later this afternoon, according to a senior official who declined to be named.

Italian Markets Find Relief After Budget-Deficit Concessions

Markets have struggled to find an equilibrium for Italian debt following the original plan outlined last week, with 10-year yields touching the highest level in more than four years on Tuesday. The Five Star Movement-League coalition still needs to release its economic-growth projections before presenting a draft budget proposal to the European Union Commission by Oct. 15. A number of officials from the bloc have warned that the populists’ plans could be in breach of their rules.

“The re-profiling of the deficit path is a constructive response and suggests some reduction in tail risks,” said Peter Chatwell, head of European rates strategy at Mizuho International Plc. “For the sake of the Italian economy, we hope this signals that a lesson has been learned.”

While details of the new proposal haven’t been announced, the euro advanced as much as 0.4 percent against the dollar. Italy’s 10-year yields dropped 16 basis points to 3.29 percent as of 3:05 p.m. in London, narrowing the yield premium on the nation’s bonds over those of German bunds to 283 basis points, from 303 basis points on Tuesday. The FTSE MIB climbed as much as 1.5 percent.

Italy conducted a bond swap Wednesday, exchanging notes maturing in 2019 and 2020 for 2.1 billion euros ($2.4 billion) of securities due in 2028.

The original plan from Rome for a deficit target of 2.4 percent over three years had prompted a push-back from the EU, with Commission Vice President Valdis Dombrovskis saying that it went “substantially beyond" what is allowed. Moody’s Investors Service and S&P Global Ratings have Italy just two notches above junk and are due to review the sovereign rating later this month.

Pierre Moscovici, the EU commissioner for economic and financial affairs, said that while potential revisions to Italy’s projections were a “good signal,” an unrevised 2019 figure risks breaking the blocs rules.

Finance Minister Giovanni Tria said at an event in Rome that the government was committed to ensuring constant debt reduction toward the objective agreed with the EU from 2020, after an increase this year and next. Di Maio said that a 2.4 percent deficit target for 2019 was confirmed, but said leaders were mulling cutting the debt-to-GDP ratio after then.

Contagion signs had started to show this week, with 10-year bund yields dropping five basis points this week through Tuesday, while a European bank share index fell 1.8 percent over the same period. FRA/OIS spreads in Europe -- a popular barometer for interbank risk -- have edged wider.

Meanwhile, Italy’s fledgling government received a boost Wednesday after a record $7.6 billion sale of high-speed airwaves, which could help it fund some of its election promises. The final bill is more than twice what the government had expected.

©2018 Bloomberg L.P.