The Italian budget drama enters the next round, as the Italian government refrained from material changes to its 2019 budget. We expect the EU Commission to start the process of launching an excessive deficit procedure (EDP) against the country relatively quickly and maybe as early as December.
The EDP will be a drawn out process and it could take until H2 19 for the Commission to impose any sanctions on Italy for breaching EU rules. Hence we think Italy could fade slightly as a market theme over the next couple of months, also because rating agencies have already assumed that the government will not improve the budget and the risk of further rating action for the next three to six months should be small.
That said, the Italian bond market could come under renewed pressure if an EDP is formally launched, and we think Italian risks could flare up again in 2019, as long as the stand-off with the EU remains unresolved. Signs are growing that the Italian economy has already been weakened by the recent political uncertainty and tighter credit conditions. Although not our base case, there is a risk that the repercussions of the budget fight triggers a recession in Italy in 2019 with adverse consequences on the debt dynamics, credit ratings and market sentiment.
Further, internal tensions between the League and Five Star on policy priorities and ideological questions have intensified in recent weeks and culminated in a Senate confidence vote last week. For now, we see only a 10-15% probability of snap elections as the two parties have an incentive to present a united front ahead of European parliament elections in May 2019, but the coalition remains a fragile truce.]
To read the entire report Please click on the pdf File Below..