Despite the latest apparent budget agreement breakthrough with the European Commission, the Italian coalition government would still like to pursue a more generous pension package for its citizens – already a significant pull on its public finances – while also increasing its social spending. Given the coalition’s existing proposals for tax at (comparatively) low rates, it is hard to see such a move as being sustainable for too long.
With the uncertainty surrounding this creating volatility in the Italian bond markets, should yields rise above 4% there is likely to be extreme pressure on Italian government debt. In all probability, this means that the European Central Bank’s (ECB) hands are tied, and that it will be unable to taper the purchasing of sovereign paper (which it has been performing as part of its quantitative-easing programme) to the extent originally planned.
All of this uncertainty is having a negative impact on Italian business sentiment, and, from our perspective, makes Italy more of a concern than an opportunity at present.”
Paul Markham, portfolio manager. Newton Investment – a BNY Mellon company.