Markets Will Judge Italy’s Spending Plans

The economist who tried to form an Italian government amid political gridlock says he’s “truly worried” about the new populist leaders’ enacting measures that will swell Italy’s national debt.

Carlo Cottarelli told foreign reporters in Rome that ultimately it won’t be the European Union regulations that will work against the populist agenda but “the markets that aren’t accommodating” about increasing Italy’s already staggeringly high national debt, AP reported.

President Sergio Mattarella last month asked Cottarelli, an expert in trimming public spending, to form a “technical” government to guide the country to a new election after Mattarella refused to allow two populist parties to forge a coalition with a proposed euro-skeptic economy minister.

Ultimately, though, the parties dropped their demands for the economy minister, Cottarelli stepped aside, and Italy’s first populist government was born.

The immediate risk of another eurozone crisis has faded, but investors are still worried about Italy.

“We surely haven’t heard the last of the Italian crisis as the new government challenges the European Union,” said Kit Juckes, a strategist at Societe Generale.

Economists are wary of the new government in Rome, which has big spending plans. A clash with EU fiscal rules could come later this year when the government presents its budget. Investors are already demanding higher interest rates to lend the heavily-indebted nation money.

Then there’s the euro. “The new government’s commitment to the euro is questionable,” said Jack Allen, European economist at Capital Economics.

A new crisis could result in contagion, hurting business confidence and slowing investment in the eurozone, where growth cooled in the first quarter.

The Bank of Italy’s debts to the eurozone central banks have rocketed to an all-time high of €465 billion ($548 billion) as Italy’s anti-EU political parties prepare to take power.

Economists see the latest figures as a sign that foreign investors are beginning to pull large sums of money from out of the country.

The bank’s Target2 liabilities to the European Central Bank jumped €39 billion in a single month. Target2 data is often watched closely by analysts as a measurement of capital flows.

The jump in debt is thought to have been caused by the surprise coalition government formed by the alt-left Five Star Movement and hard-right Lega parties.

David Owen of Jefferies Investment Banking Group said foreign funds are being rotated out of Italy and into accounts in northern Europe, particularly in Germany, Luxembourg or The Netherlands.