There is “no end in sight for Italian fiscal standoff”, a leading group of economists has said, and the cost of borrowing for the Italian state will rise to 5% by end of 2020.
Capital Economics in London said that Italian Finance Minister Giovanni Tria has made some attempt to defuse the row with Brussels over the budget plans of recently elected coalition League and Five Star Movement by saying it will move again to reducing its structural budget deficit under EU rules, in 2022. He has also said that Italy is committed to staying in the eurozone.
It comes as Eurogroup head Mario Centeno said the latest messages from Rome and the European Commission are “very positive” and he expects agreement to be reached on the blueprint.
“In all likelihood, this will be a request for the Italian government to submit a revised budget, which it would have to do within three weeks.
If the government failed to do this or submitted a budget that did not gain the commission’s approval, the matter would be referred to the European Council [made up of the leaders of the EU heads of states] for further deliberations,” Capital Economics said.
“This could be a long, drawn-out political process. Even if Italy eventually faced sanctions for flouting the EU’s budget rules, those sanctions wouldn’t come until after Italy was put back into an Excessive Deficit Procedure, which might not happen until next year,” it said. However, the economists say the commission could be forced to act faster if yields of Italian bonds were to rise again steeply.
“One thing that could cause the situation to come to a head sooner would be a sharp rise in Italian bond yields.
The government has previously said if the spread between Italian and German 10-year bond yields reached 400 basis points [from around 300s currently], it would be forced to take action to reassure markets,” it said.
“However, with Moody’s on Friday showing little inclination to push Italian government bonds into junk status, we are comfortable with our view that this will be a slow-burn issue for Italy rather than a full-blown crisis,” it said, projecting the 3.5% 10-year yield will rise to 5% by the end of 2020.