As Italy's ruling populists hint that they would be open to lowering their budget deficit target (on the condition that they have enough left over to fulfill their campaign promises for generous tax cuts and social welfare programs), investors in Italian bonds are happier than they have been in months. Yields on Italian bonds declined to their lowest level in five months, having erased the entirety of their budget conflict-inspired rise, on reports that the EU might be willing to shelve its "Excessive Debt Proceedings" if the Italians agree to a meaningful reduction.
But amid the sudden shift in the relationship between the EU and the leaders of the bloc's third largest economy, one Italian newspaper appeared determined to spoil the fun. La Corriere della Sera published a story on Wednesday claiming that Economy Minister Giovanni Tria - who is still viewed by investors as the adult in the room, despite having set aside his concerns about fiscal prudence by comparing a budget-deficit reduction to "suicide" - might be looking to leave the government before the new year, according to Bloomberg.
According to the report, Tria is "more tempted" to leave than before, and is privately said to be contemplating departing his post during the period between Christmas and New Year's, after the budget has (hopefully) been approved by the EU. Tria is said to be "tired" of attacks on his credibility and has become increasingly dissatisfied with Prime Minister Giuseppe Conte, who recently told the Italian press that he would be "in charge" of talks with Brussels. According to media reports, Conte is preparing to deliver another budget draft to the EU that would shrink the projected deficit to 2%. Conte told the newspaper La Repubblica that he believes the government can shave 2 billion euros off the cost of its "citizens income". But since Conte has taken on the role of lead negotiator, Tria has felt "paralyzed" and is struggling to find a new place in the government. The economy minister skipped a Q&A with lawmakers that followed the government's trip to negotiate with Brussels because Conte handled it.
Yesterday, Tria told reporters following a meeting with EU finance ministers that the government's pension reform plans would be preserved, adding that talks were "collegial", though he declined to say what specifically had been discussed, according to Reuters.
When asked by reporters, Deputy Prime Minister Matteo Salvini denied the rumors and claimed that Tria and Conte "get along well." While Italy appears to be making progress, Tria's departure could easily spoil the recovery in Italian assets by adding to concerns about the Italian economy, which contracted during the three months through September. And "soft" data - specifically the November PMI - released since then suggest that the slowdown will only continue. Manufacturing shrunk at its fastest pace in four years last month, according to the data.
If Tria leaves, expect investors to worry that the populists' recent flirtations with a more disciplined budget deficit could fizzle after the departure of the one "adult in the room."