Italian Bonds, Stocks Rally As Prime Minister Confirms Cut To Budget-Deficit Proposal

Italian bond yields moved lower for a second day to touch their lowest level since Sept. 27 while Italian bank stocks lead the country's benchmark index higher after Italian Prime Minister Giuseppe Conti said that the government would cut its deficit projection in a new version of its budget, confirming that the Italians have offered a concession to the EU amid a tense standoff that recently prompted the bloc's leadership to threaten its third largest economy with billions of euros in fines.

Though it's still unclear whether Europe would accept the revised figure of 2.04% (down from 2.4%), at least one senior official - Commissioner Pierre Moscovici - told French lawmakers on Thursday that "constructive talks" were ongoing with Italy. Though conflicting reports have abounded earlier this week, it appears that Conti, Deputy Prime Ministers Matteo Salvini and Luigi di Maio (the two populist party chieftans who are effectively running the country) have agreed on the 2% figure.


Cutting against the populists' claims that any budget-deficit reduction must leave its welfare promises untouched (claims that, from the beginning, sounded somewhat suspect given the magnitude of the cuts), one minister said Thursday that cutting "a few billion" euros from its key reforms would require Italy to roll back its plans to cut the retirement age and introduce a "citizens income".

Italy’s government will cut “a few billion” euros from its two key reforms in order to hit the new deficit target it proposed to the European Commission, deputy industry minister Dario Galli said on Thursday.

The ruling coalition on Wednesday offered to lower its deficit target for next year to 2.04% of gross domestic product from a previous 2.4% to avoid disciplinary action from the EU.

"A few billions (in savings) compared to the original theoretical forecasts will come from the realistic implementation of the (government’s) most relevant measures from a political point of view," Galli told La7 broadcaster, referring to income support and the introduction of a lower retirement age.

Speaking with reporters Wednesday night, Conti insisted that the EU would seriously consider Italy's "serious" offer.

"We made a serious and reasonable offer," Conti said.

However, according to one anonymous government source, negotiations with Brussels are ongoing (per the Guardian). 

Newspaper La Stampa cited an EU "source” as saying that there is “still a gap to bridge, hopefully we can do it with the work that will continue in the coming days."

The yield on the Italian 10-year bond dropped below 3% on Wednesday, leaving it lower than the 10-year Treasury yield. The spread between BTPs and bunds has fallen to its lowest level in 2 months, sliding as low as 260.65bps this morning.

Yields could move higher still if the ECB makes good on expectations that it will announce the end of three-and-a-half years of bond buying, though dovish policy guidance could send spark a reversal.