ROME, Sept 26 (Reuters) – Italy is facing increased market scrutiny as Prime Minister Giorgia Meloni prepares a difficult 2024 budget, with sectors from banks to airlines affected. Investors are disappointed with the government’s move to grant more.
The Treasury is expected to announce new economic targets on Wednesday, and Meloni is expected to lay out a budget framework that will cut the deficit while also keeping his promise to cut taxes.
This challenge is made more difficult by weakening growth prospects and high financial incentives for green housing improvements that were introduced long before she took office but continue to weigh on public accounts. There is.
Tim Jones, a eurozone analyst at market consultancy Medley Advisors, said: “This budget is Meloni’s first real economic test since he took power in October last year.”
“With the European Central Bank withdrawing from its role as a buyer of Italian debt, Italy will be forced to make the kinds of choices that have slowly brought down other Italian federations over the past 30 years.”
Mr. Meloni has far less wiggle room than he did a year ago when he raised the deficit target in his first budget.
Fiscal consolidation is currently becoming more important at European level, with governments negotiating new fiscal rules to be introduced next year after being interrupted in 2020 due to the coronavirus pandemic.
The move comes amid signs of deteriorating market sentiment towards Italy, with Meloni as long as it needs a buyer for its public debt, which is worth about 142% of the country’s output, the second-largest in the euro zone after Greece. He doesn’t have that luxury.
“Increasing deficit, slowing growth”
The difference in yields between Italy’s benchmark 10-year BTP bond and the safer German Bundestag rose to about 1.86 percentage points (186 basis points), the widest since late May.
“The supportive factors that enabled the spread to reach our 160 basis points bullish scenario have disappeared,” Morgan Stanley said in a note to clients this month. “We expect the fiscal deficit to widen and growth to slow.”
He predicted the spread would rise to 200-210 basis points by the end of the year.
Italy’s government now expects this year’s budget deficit to overshoot its official target of 4.5% of gross domestic product (GDP) by around 5.5%, sources told Reuters. .
Rome also plans to raise its 2024 budget deficit target to 4.1-4.3% of gross domestic product (GDP), up from the 3.7% target set in April. A source familiar with the matter told Reuters on Monday.
After a cautious start, Meloni’s right-wing government began to raise investor eyebrows by repeatedly attacking the European Central Bank over interest rate hikes and then refusing to approve reforms to the EU bailout fund.
Italy is the only EU member state opposed to reforming the fund, known as the European Stability Mechanism (ESM), and the country’s ruling coalition says the proposed changes would increase the likelihood that Rome will be forced to restructure its debt. Are concerned.
Anxiety over Meloni’s economic vision soared last month when the government announced an unexpected windfall tax on bank profits, but various attempts at clarity have calmed the market panic, but uncertainty remains. Sexuality did not subside.
Italy’s top banker told Reuters on condition of anonymity that the move prompted a flurry of calls from worried foreign investors and forced asset managers to return from vacation to deal with the market crash. He says he had no choice but to do so.
The case targeting airlines and investors in Italy’s 307 billion euro ($326.74 billion) bad debt market follows a similar pattern.
The government last week withdrew plans to cap airfares to the Italian islands after airlines such as Ryanair (RYA.I) challenged the legality of the original proposal.
interventionism and uncertainty
Roberto Perotti, an economics professor at Milan’s Bocconi University, said the proposed airfare restrictions showed Meloni’s Italian Brotherhood party “doesn’t have a free market culture.”
Days after the bank tax, Brothers of Italy submitted a plan that would allow debtors to repay their arrears at a discount, allowing companies to make profits by buying bad loans from banks and forcing repayments. In effect, it set a ceiling on profits.
Mr Meloni subsequently said no measures were planned on bad debts, but the party’s proposals are still before parliament and uncertainty remains.
On the other hand, economic pitfalls are also increasing. Apart from tensions over the budget and the ESM, Italy is also struggling to meet the policy goal agreed with Brussels to release billions of euros in post-pandemic recovery funds.
Investors aren’t the only ones worried about Italy. Two EU central bank presidents also told Reuters on condition of anonymity at a recent meeting of EU policymakers that they were concerned about Rome’s finances.
A third said Italy’s central bank’s frequent dovish comments cast doubts on its efforts to combat inflation, while a fourth said the ECB should halt bond purchases altogether, citing the risk of a spike in Italian bond yields. It was assumed that it was not.
(1 dollar = 0.9396 euro)
Valentina Za reports from Milan; additional reporting by Francesco Canepa, Giuseppe Fonte, Sala Rossi and Gianluca Semeraro; editing by Ed Osmond and Giselda Vagnoni
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