May 22, 2018
This was the day when people who were left speechless by the political events in Italy started to talk. In Germany it was the now cancelled request for a monetary financing of Italy’s debt that triggered a collective nervous breakdown. CDU and CSU have both produced extremely hostile reactions, talking about blackmail and a eurozone endgame.
In Italy, President Sergio Mattarella is also reported to be considering in particular the economic implications of the Five Star/Lega deal before giving the final go-ahead for Giuseppe Conte, the obscure law professor picked by Five Star and Lega, to serve as prime minister. It is clear that he is the kind of prime minister who will be in office, but not in power.
What preoccupied Italy yesterday was the rise in the 10-year government bond spreads to 190bp at one point, before easing a little to 185bp. One of the factors was a warning by Fitch of another ratings downgrade. Fitch already cut Italy’s credit rating last year to BBB, citing fiscal concerns. With the publication of the coalition agreement, these concerns have now grown stronger.
"Full implementation of the core fiscal commitments, notably universal basic income, dual flat tax and changes to the retirement age, would significantly increase the general government deficit... Proposed revenue-boosting measures, for example on tax compliance and amnesties, would not offset these commitments and the programme is inconsistent with the incoming government’s stated objective of reducing public debt, in our view."
The CDU’s economic council warned about a eurozone endgame, and said that Angela Merkel’s policy of kicking the can down the road had led to a situation where the debtors are now in a position to blackmail the creditors. Its general secretary was quoted by FAZ as saying: why should German households pay for rich Italians? The head of the CSU in the Bundestag, Alexander Dobrindt, also demanded that under no circumstances Germany should pay for Italy’s debt programme. His colleague in the European Parliament, Manfred Weber, says Italy was playing with fire, and was risking another eurozone crisis.
Jens Nordvig (@jnordvig) has already detected a fledgling debate about whether the ECB should intervene to contain the rise in the Italian spread. He thinks not, but what strikes us is the persistent optimism of commentators who see the ECB as providing an unconditional backstop. All the ECB has at its disposal is the OMT programme. Italy clearly would not fulfil the conditions for it.
We also have stories on the rather limited size of the proposed fiscal backstop for bank resolution; on the eurozone’s falling trade surplus; on whether Nato will survive Trump; on what comes after the staff level agreement in Greece; on a Brexit effect on Spanish exports; on Northern Ireland's disillusionment with Brexit; and on whether Corbyn will change his view on the single market.