- Italian Bonds Slide After Italy’s New Prime Minister Spooks Markets With “Radical” Plans
by Tyler Durden, https://www.zerohedge.com/
The eye of the hurricane may have passed over Italy and the winds are again starting to pick up speed, because shortly after Morgan Stanley laid out what a worse case scenario for Rome could look like (ugly, read here), Italian bonds started selling off again, with 2Y yields rising to session highs following Italian premier Conte’s inaugural speech in which the populist premier spooked markets by reiterating that the new populist government will pursue a radical policy program, and highlighting legislative priorities that will be extremely costly – including the right to universal income, minimum wage, overhauling the healthcare system, prioritizing social rights, and so on – all without saying just how these will be paid for (spoiler alert: much more debt).
Conte also said that a new flat tax would be introduced, even if no timeframe has been provided, and there was no mention of avoiding the hike in sales taxes which is currently planned for 2019, or canceling the “Fornero” pension reform.
Amusingly, in the speech Conte also said that he plans on reducing public debt, although in light of the surge in spending which will not be financed with increased revenue, it is not clear how that can be achieved. As Bloomberg economist Stephanie Flanders notes “Italy cannot convincingly cut its public debt as a share of GDP without reasonable growth in nominal GDP (real growth plus inflation). Even the more optimistic forecasts do not point to nominal GDP growing much faster than 2.5% in the foreseeable future. By contrast, the average cost of its public debt is 3.1%.”
A much more important chart is the following from Morgan Stanley showing what would happen to Italy’s debt/GDP if interest rates rose even modestly from their artificially low levels.