Stockbeat – Italy’s Budget Woes Return To Haunt Its Stock Market – Wednesday, May 15, 2019
Italy’s Achilles heel is starting to trouble its stock market again.
The FTSE MIB has been the big laggard in Europe over the last month and the underperformance is getting starker, as the economic slowdown puts the populist coalition in Rome on a collision course with the European Union’s budget cops.
The issue flared again on Tuesday after deputy Prime Minister Matteo Salvini threatened to increase spending and openly breach EU deficit and debt limits, if needed, to support growth and stop unemployment rising.
“Until we arrive at 5% unemployment, we will spend everything that we should and if someone in Brussels complains, that won’t be our concern,” Reuters reported Salvini as saying.
The comments drove Italy’s 10-year bond yields to a two-month high of 2.76% and the premium over their German counterparts widened to 283 basis points, the most in three months.
Such movements effectively raise the cost of capital and hit the profitability of all Italian companies, especially its banks.
The MIB is still reeling from Salvini’s comments this morning, down 0.7% and the worst-performing major index on the continent.
Tellingly, Italy’s two largest banks, Unicredit (MI: CRDI) and Intesa Sanpaolo (MI: ISP), are both near the bottom of the index, down 1.9% and 1.6%, respectively, by 4 AM ET (0800 GMT).
The benchmark Euro Stoxx 600 was down 1.4 points, or 0.4% at 374.98. The U.K. FTSE 100 was down 0.1% and the German DAX down 0.4%.
Over the last month, the MIB has lost 5.4%, compared to a drop of only 3.7% for the Stoxx 600 and 1.4% for the Dax.
Italy and the EU had struck an uneasy peace over the new year, Brussels turning a blind eye to a budget forecast from Rome that rested on some heroic growth assumptions.
However, the European Commission slashed its 2019 growth estimate for Italy to only 0.1% when it updated its economic forecasts last week. It now sees the budget deficit at a much higher-than-projected 2.5% of GDP, rising to 3.5% next year, a level most economists see as unsustainable.
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