Italy: Testing the limits – Nordea Markets

Analysts at Nordea Markets point out that Worries about Italy have picked up again as the government defies both the EU fiscal rules and signals from financial markets.

Key Quotes

“Despite the rough ride, we find that the Italian debt load remains sustainable, albeit barely.”

“Many risks still lie ahead.

• The proposed 2019 deficit is unlikely to be funded without a further sell-off in BTPs.
• While the government is likely to modify its stance momentarily, it remains popular, and will continue to try to implement as much of its programme as markets can stomach.
• The government has some wiggle room on rates, as the average fixed coupon of Italian debt is around 3.05%, short of the 4.25% sustainability benchmark that we have estimated.
• Should the Italian story continue to weigh on the EUR, we estimate a sensitivity of roughly 2.5-3% weaker EUR in trade-weighted terms per 100bp wider 10-year spread between Italy and Germany.
• Credit rating downgrades are likely unavoidable.
• Clashes with the European Commission are inevitable, but the Commission will probably lack the courage to fine Italy and will thus be a side story.”