Italy CDS Blows Out As Anti-Establishment Parties Reach Government Deal

After a series of false alarms over the past week, on Friday morning Italy's anti-establishment Five Star Movement (M5S) and the far-right Northern League have finally agreed on a policy program, ending a monthslong stalemate.

The 57-page "Contract for a Government of Change" was published early Friday and includes a handful of key provisions that have, unsurprisingly, made bondholders nervous:

  • ITALY FIVE STAR, LEAGUE PROGRAM URGES REVIEW OF EU FISCAL RULES
  • FIVE STAR, LEAGUE PLAN SEEKS 15%, 20% TAX RATES FOR COS, PEOPLE
  • FIVE STAR, LEAGUE PLAN SEEKS REVIEW OF BAIL-IN RULES: PROGRAM

According to Bloomberg, the proposed program, published on Di Maio’s Facebook page,  includes a review of EU fiscal rules, the rolling back of pension reforms that raised the retirement age, as well 15-20% tax thresholds for companies and people. According to an estimate by former IMF official Carlo Cottarelli, it may cost as much as 126 billion euros ($148 billion).

The document, the culmination of two months of work following a political stalemate in the euro zone’s third-largest economy, calls for billions of euros in tax cuts, additional spending on welfare for the poor and a roll-back of pension reforms. Here's a roundup of its key clauses courtesy of Bloomberg and the Financial Times:

  • Seeks 15% and 20% tax rates for companies and people
  • Seeks guaranteed minimum income for poorer Italians
  • Universal basic income of €780 per person per month, funded in part through EU
  • Seeks end to Russia sanctions
  • No mention of a referendum on membership of either the EU or the euro
  • Agreement to meet the goals of the Maastricht Treaty
  • No plans to ask the ECB to cancel debt
  • Calls for airline Alitalia to be relaunched
  • Seeks to scrap Fornero pension reform
  • Flat tax to become a dual rate with deductions
  • Seeks a strong contribution to EU immigration policy
  • Plan calls for redefining of lender Monte dei Paschi di Siena’s mission

There was some good news: the plan does not mention the dreaded €250BN write-off, and drops the request to exclude QE bonds from Italy's debt/GDP calculations, both seen as euro-positive although the EURUSD promptly sank to session lows after the contract was revealed. The plan also drops reference to euro-exit procedure. An earlier draft of the accord, reviewed by Reuters, had called for the EU to create fiscal headroom for Italy by adjusting the formula used to calculate the nation’s debt burden, which the rules say must be reduced.

The “contract” has still to be approved by their memberships, in votes to be concluded by Sunday.

"This government contract binds two political forces that are and remain alternative, to respect and achieve what they promised to citizens," Di Maio said, quickly sinking the euro as it headed for what would be its fifth straight weekly fall against the dollar since 2015. Meanwhile, stocks in Milan hit their lowest level in a month as Italian investor fears, inexplicably dormant for months, finally reappeared.

Italian government bonds also retreated on Friday, sending 10-year yields to their highest levels in seven months as investors worried that the new ruling coalition was about to embark on a spending spree.

Meanwhile traders and hedgers - concerned about an imminent deficit-busting debt issuance spree - are starting to wave in Italian default protection, and this morning, Italian credit default swaps soared to their highest levels since January...

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... while BTP/Bund spreads are also soaring:

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The deal ends a lengthy stalemate that had persisted since Italy's March elections. Recently, the party's were facing the prospect of another vote either over the summer or early next year if they did not agree on a platform. The two parties still need to pick a prime minister.

The full contract is below:

 

Comments

Teja bshirley1968 Fri, 05/18/2018 - 07:49 Permalink

Sure it is? Sometimes such events are underestimated. The most important breakthrough for Fascism was in Italy, and that event also was underestimated.

Not saying that Lega & M5S would introduce fascism, though. They have quite different positions and visions in regards of organisation of the Italian state. The main issue is that they lack the ability to push through painful reforms and changes, both structurally (due to them not being experienced and linked enough to the apparatus) and financially (due to be bound to the Euro).

And if they decide to withdraw from the Euro and solve the finance problem with the printing press, Italian savers will create the mother of all bank runs.

So maybe they will follow the Greeks in starting with big rhetorics and then implementing austerity. But maybe not, because Italy is much more powerful than Greece.

Italy's economy is 50% larger than Russia's, by the way, so any dreams of Russian help here will remain such.

My long term prediction would be that Italy will split or at least reorganize its state structure towards a more federalized structure.

- Lega is successful in the North, M5S in the South
- Dangerous competition for Lega populism comes from northern autonomy movements (South Tyrol, Veneto)
- Dangerous competition for M5S comes from southern revivalists, Neo-Bourbons and such

In reply to by bshirley1968

chubbar bshirley1968 Fri, 05/18/2018 - 08:21 Permalink

Until, and unless, these idiots agree to leave the EU, it's all meaningless and anyone who's paying attention knows it. These fucktards really think that they are going to have any control over Italy while still in the EU? Brussels doesn't give a shit what these idiots are telling their people, they'll do what they are told unless they leave the union. leaving the union means that they sack up and be prepared for assassination attempts and financial destruction.

In reply to by bshirley1968

zvzzt Uchtdorf Fri, 05/18/2018 - 09:10 Permalink

Far right is a term so misused, it's not even funny anymore. The term (perhaps) relates to a form of nationalism or xenophobia or something like that. It has absolutely nothing to do with other policies. In that sense, 'conservative' or 'libertarian' is much better. Wilders in NL is (so called) far right, but is economically about as left leaning as any greenparty/socialist party. Same goes for the Nazi's which where highly socialist  (hence the name)  if not outright communist (hence the conflict with the communists?). 

Far right parties also want more government and regulation. They are not really the feared parties in a political system. It's like regulations: big companies cry crocodile tears because of the restrictions, but in fact the many rules help keep out competition from smaller and more efficient companies. 

In reply to by Uchtdorf

To Hell In A H… Fri, 05/18/2018 - 07:03 Permalink

"I TOLD YA SO!, I TOLD YA SO!, I TOLD YA SO!"  They were always anti-immigrant leftists. Nothing more. At least its a start., but as contemporary history has shown. You can go after the easy pickings and scapegoats, but take on, free yourself from debt bondage, unyoke yourself from debt serfdom and attempt to dismantle the banksters, they always fold like a cheap suitcase. ALWAYS! Why is that?

CHX13 Fri, 05/18/2018 - 08:30 Permalink

Under the premise that Italy is too big to fail for the EU one might load up on Italian debt - I wouldn't be surprised if the the banksters did and pull off a Greek-style "rescue" which was really just paying out the banks big on behalf of the rest. Privatizes the gains and socialize the costs has been a winning strategy for them for a long time now. Will it be this time too ?

Synoia Fri, 05/18/2018 - 08:48 Permalink

They will have to become sovereign in their own currency to pull this off.

To become sovereign in their own currency requires a parallel currency, the lira, in circulation.

Which in turn causes immense complications in their retail banking sector.

Are there enough programmers in Italy, working for the banks, to pull this off? It cannot be outsourced, as India does not speak Italian.

silver140 Fri, 05/18/2018 - 11:11 Permalink

If the Italians continue using the euro, and it looks like they are, then they're fucked. There's going to be more debt slavery, privatization of every public institution, the sell-off of natural resources, and the degradation of Italian culture and sovereignty. Another Greece in the making. 

Promethus Fri, 05/18/2018 - 19:16 Permalink

If you wish to dream these pie-in-the-sky fantasies then don't  put out the welcome mat for every turd world troglodyte floating off your co!ast. Bring in the Chinese or Vietnamese who will actually work and not troglodytes.