INTERNATIONAL - 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 headed for the biggest gain in more than a week after the Corriere della Sera reported that the government will seek to contain the shortfall at 2 percent in 2021, down from 2.4 percent.
The target for 2020 will be trimmed to 2.2 percent, while next year’s goal of 2.4 percent will remain, the newspaper said.
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 eight basis points to 3.37 percent as of 11:34 a.m. in London, narrowing the yield premium on the nation’s bonds over those of German bunds to 292 basis points, from 303 basis points on Tuesday. The FTSEMIB 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 EU’s response to the revised targets will still be a key hurdle for investors. The original plan from Rome for a deficit target of 2.4 percent over three years had prompted a push-back, with the European 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.
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. Deputy Premier Luigi 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.