Robeco: taly - no meaningful step back on the 2019 deficit

Marktrückblick

The sell-off in BTPs has continued this week as the Lega - 5 Star coalition did not step back from its 2.4% deficit for the 2019 draft budget.

08.10.2018 | 14:55 Uhr

Main market events

The sell-off in BTPs has continued this week as the Lega - 5 Star coalition did not step back from its 2.4% deficit for the 2019 draft budget. The minor downward revision regarding the 2020 and 2021 budgets did not convince neither the European Commission or markets. What is striking so far has been the limited contagion effects to other peripheral spreads. The only exception has been Greek spreads this week, which ended 45 bps higher, a similar magnitude than for BTPs. Italian bonds have returned -5.5% year-to-date, Spanish bonds 1.4%, Portuguese bonds 1.5% and Irish bonds -0.1%.

ECB

According to “ECB sources”, the ECB is considering not to apply the new capital keys in 2019, to “avoid the impression that Italy is being punished. Italy is indeed set to see some slight drop in share next year. Finally leakages regarding potential operation twist could reinforce the impression that the ECB is concerned by the political situation in Italy and tempting to find some backstop in the event of escalating tensions between the Italian government and the EC. 

Italy

Despite the substantial sell-off in BTPs that followed the announcement of a 2.4% deficit for 2019, the Lega-5 Star coalition only revised its projected deficit for 2020 (2.1% of GDP) and 2021 (1.8%) but not the deficit for 2019. To the extent that this current government may not be in place when these budgets will be negotiated, this step back is not binding at all. No surprise that an official from the European Commission on Wednesday said that only the 2019 deficit print will be considered when deciding whether engaging Italy into an Excessive Deficit Procedure (EDP). If implemented, this will be the first time that the EC decides an EDP based on deficit forecasts and not on observed past data. Against this backdrop, the current confrontational posture  of some members of the Italian government does not bode well for an loose interpretation of EU fiscal rules. In particular, Salviani attacking directly key EC officials in these terms “ people like Juncker and Moscovici… have ruined Europe and Italy” may not be the best approach to get favors from EU institutions. This has contributed to maintain an elevated risk premium on BTPs, with 10-year spread still around 285bps. 

Robeco Euro Government Bonds

This week we slightly increased our exposures to Italian BTPs (5-year maturity). With this tactical addition, we are a touch overweight Italy. We continue to think that the Italian government will reduce its 2019 budget deficit in order to comply with EU fiscal rules. But in the meantime, some further confrontation with the European Commission is likely. We also reduced our Spanish and French bond holdings. Currently the fund is 34% invested in peripheral bonds, less than the index level as expressed in market value. Year-to-date the fund’s absolute return is -1.33%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, 04 October, 2018. The value of your investments may fluctuate. Past results are no guarantee of future performance.

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