Robeco: Tensions between Italian coalition parties may escalate

Italian bonds have returned -3.4% year-to-date, Spanish bonds 2.0%, Portuguese bonds 1.7% and Irish bonds 0.4%.

ECB

On Thursday, the ECB press conference that followed the Governing Council meeting was slightly hawkish relative to market expectations. Draghi appeared quite confident about both the strength of the Eurozone economy and the core inflation path, thanks to the recent vivid and broad-based recovery of real wages. Meanwhile the message sent by Mario Draghi this week to the Italian government was pretty clear: the ECB is expecting that the 2019 budget will comply with the EU rules, after the “damage” done on interest rates by certain “words”.  

Italy

Negotiation about the 2019 Budget led to some tensions between the two coalition parties over the past days. As Italy has now turned to a more prudent and realistic fiscal strategy, the funding available to meet electoral promises appears quite limited. Strains may escalade somewhat as 5 star is losing momentum in polls and may intensify the pressure to get the EUR 10bn to fund its basic income. Meanwhile Lega would prefer a reduction in the minimum retirement age to 62 years in the Budget law (currently 67 from 2019 onwards) rather than the tax rate cut. It would represent 0.3% of GDP if this measure were to be included in the budget next year. If implemented, the probability of rating agencies downgrading Italy would then increase. Against the uncertain political background, economic activity sharply declined in July with industrial production falling by 1.8% MoM (against -0.3% expected).

Greece

This week the head of the European Stability Mechanism (ESM) Klaus Regling threatened Greece to stop debt relief measures if Prime Minister Tsipras were to implement broad tax cuts, raise the minimum wage and postpone the pension cuts. These promises clearly circumvent the agreed fiscal plan with the IMF and the European Commission which targets a primary surplus of 3.5% of GDP. 

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