Italy should get some fiscal space – ANZ

Analysts at ANZ point out that the appointment of the populist government in Italy raised concern about a new localised sovereign debt crisis earlier this summer.

Key Quotes

“Whilst the aggregate spending plans of the new administration amount to some EUR90–100bn a year, indicating a budget deficit in the region of 6% of GDP, Rome is insistent that it will adhere to the EA budget guidelines. That requires a cyclically adjusted deficit no greater than 3% of GDP over the medium term.”

“We expect that Brussels will grant Italy some fiscal space in the short run, especially as it will not want to fan populist support ahead of next May’s European elections. Interestingly, despite the tantrum in the BTP market in June, there were no contagion effects, and EA financial conditions remain supportive of the expansion. As headline inflation rises, real interest rates are falling deeper into negative territory.”

“There may be short-lived bouts of volatility associated with Italy’s fiscal position, but it is not our view that they will prove systemic to the EA’s recovery.”