Italian bonds hit over possible EU revision of 2019 budget plan

REUTERS  Chris Wattie

Italian government bond yields dropped across the board, and the gap between the yield on the 10-year benchmark and its German equivalent narrowed.

Moments ago, Spiegel confirmed this when it reported that the "dispute between the EU Commission and Italy's populist government is entering the next round" after EU Commissioner Guenther Oettinger said that the EU Commission would reject Italy's 2019 budget plan, which is not compatible with EU rules.

The weeks of wrangling that preceded the budget's approval and the previously announced plan to raise the deficit took markets on a roller coaster ride, but its passage by Conte's cabinet seemed to be saluted with relief. "On the strength of this position, we go to Brussels with a budget that we are proud of and that we want to discuss without prejudices".

At the same time the 19 countries sharing the euro want to integrate more deeply in economic terms, by giving more powers to their bailout fund ESM, setting up a euro zone budget and a euro zone-wide deposit insurance scheme.

The spending boost is essentially due to what the government calls its "people's budget", a series of pension and tax changes that will cost 37 billion euros ($43 billion), of which 22 billion will be paid for by expanding the deficit.

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European authorities are already shown to be critical to the figures made public by Italy at the beginning of the month, especially as the public deficit, expected to reach next year to 2.4% of the gross domestic product (GDP). Italy's budget puts its economy minister, Giovanni Tria - seen as a moderate influence in the coalition - in a hard position as he has pushed for lower spending but was overruled by the coalition leadership.

Earlier, Spiegel magazine reported that the Commission has already chose to reject the budget plan, citing comments from Oettinger. One of the key forecasts in the budget is that Italy's high debt to GDP ratio, of around 130 percent now, will decline to 126.7 percent of GDP in 2021. We're dealing with an global shame, and Mr Macron can't pretend he doesn't know.

This contravenes European Union regulations that call on Italy and other highly indebted countries to steadily narrow the shortfall toward zero. "Europe needs Italy and Italy needs Europe", Juncker said, answering "No" when asked if Europe could survive an Italian exit.

Alessandro Tentori, chief investment officer for Italy at Axa Investment Managers, told CNBC Tuesday that there was so far little detail in the budget about growth and investment projects.

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