The Italian government has an important task ahead that could ultimately bring about further market turmoil.
Lawmakers have to approve a budget for the coming year and send it to the European Commission before mid-October. The financial plan will be closely scrutinized by European authorities, but, more importantly, by market players, CNBC reported.
“This budget is a critical test of the credibility of the government in the eyes of market participants,” Erik Jones, professor of international political economy at Johns Hopkins University, told CNBC via email.
“Here you have to pay close attention to longer-term debt sustainability. Even if the (European) Commission gives maximum flexibility and the coalition partners find some way to work together harmoniously, this could all go pear-shaped if market participants believe that the resulting increase in deficits puts Italian public debt on an unsustainable growth trajectory,” he said.
Italy has the second-largest public government debt pile in the eurozone, at about 130% of its gross domestic product. As a result, many traders question if the third-largest euro economy will be able to keep repaying its debt.
The debt problem became particularly acute over the last year or so, particularly in the aftermath of March’s general election. Two populist parties, the far-right Lega (League) and the leftist Five-Star (M5S), reached a coalition agreement after months of political impasse, but their promises to increase public spending caused jitters among market players.
“More than ever, this budget plan is a key event for the market. First, the budget will spell out the new government’s economic policies and clarify the implementation timeline of the announced reforms,” Bank of America Merrill Lynch said in a note Thursday.
“Second, it will define the new administration’s stance on the fiscal discipline requirement. This is especially important in light of the busy calendar with the rating agencies’ review of Italy’s outlook.”
The three major credit rating agencies are due to pass judgment on the Italian economy in the coming weeks and ahead of its final budget plan.
This lack of confidence was evident Thursday after Deputy Prime Minister Luigi Di Maio told reporters that the new budget would include pension reform, tax cuts and a citizen’s income, which could add billions more to the government’s spending bill. Government debt yields rose on the news.
