(Reuters) An Italian court has convicted 13 former bankers from Deutsche Bank, Nomura and Monte dei Paschi di Siena over derivative deals that prosecutors say helped the Tuscan bank hide losses in one of the country’s biggest financial scandals.
The verdict, read in court on Friday by lead judge Lorella Trovato, also ordered fines and asset seizures worth a total of 68 million euros from Deutsche Bank AG <DBKGn.DE> and 91.5 million euros from Nomura Holdings Inc <8604.T>.
Monte dei Paschi reached a settlement with the court over the case in 2016 at a cost of 10.6 million euros.
The case centres on two complex derivatives transactions — known as Alexandria and Santorini — that Nomura and Deutsche Bank arranged for Monte dei Paschi in 2009.
Prosecutors said the deals helped Monte dei Paschi, which was founded in 1472 and is Italy’s fourth biggest lender, hide more than 2 billion euros of losses racked up after the costly acquisition of a smaller rival in 2008.
“We are disappointed with the verdict. We will review the rationale for it once it is published,” Deutsche Bank said in a statement.
Nomura also said it was disappointed. “After thoroughly examining the content of the judgment, the company will consider all options, including an appeal,” it said.
The scandal, together with more losses suffered by Monte dei Paschi during the euro zone debt crisis, threatened to destabilise Italy’s financial industry and forced the Siena-based lender to seek an 8 billion euro state bailout in 2017.
In the trial, which started in Milan in December 2016 and took 100 hearings to complete, the three banks and 13 defendants faced allegations of false accounting and market manipulation between 2008 and 2012.
Monte dei Paschi and its former top managers were also accused of misleading regulators.
In recent years, instances of bankers being convicted of fraud have been relatively rare and experts said any conviction in this case would come as a surprise.
While few executives from major global banks have faced criminal charges for their roles in the financial crisis, there have been several convictions of senior bankers at smaller European lenders.
In 2017, four former managers of Spanish savings bank Caja de Ahorros del Mediterraneo, and former International Monetary Fund chief Rodrigo Rato were jailed by Spain’s High Court in similar corruption cases related to the financial crisis. (https://reut.rs/2rmCYKZ)
In the Monte Paschi trial all defendants have always denied wrongdoing and none of them will serve time in jail before the lengthy appeals process is exhausted.
First trial jail sentences in Italy can be significantly reduced or completely overturned in the appeals process. Some of the Monte Paschi former executives convicted on Friday have been acquitted by higher courts in related trials.
Monte dei Paschi’s former chairman Giuseppe Mussari, one of five former executives from the Tuscan bank on trial, was given the heaviest sentence of seven years and six months in jail.
Deutsche Bank and Nomura were both convicted as institutions for failing to prevent wrongdoing by their employees.
All six defendants linked to Deutsche Bank and the two who once worked for Nomura were handed jail terms.
They include sentences of four years and eight months each for Ivor Dunbar, former co-head of Global Capital Markets at the German bank, Michele Faissola, its former head of Global Rates, and Michele Foresti, its former head of Structured Trading.
Nomura’s former chief executive officer for the EMEA region, Sadeq Sayeed, was also given a sentence of four years and eight months while Raffaele Ricci, the former head of the bank’s EMEA Sales, was handed a sentence of three years and 5 months.
Lawyers for the defendants said they expected to appeal the verdict once the full ruling is released.
(ZH) update: Though Erdogan has been used to getting his way utilizing his well-known bullying tactics, it appears Europe is not going to fold this time.
After yesterday European Commission President Jean-Claude Juncker declared of Turkey’s push to militarily carve out a ‘safe zone’ in northern Syria that“if the Turkish plan involves the creation of a so-called safe zone, don’t expect the European Union to pay for any of it,” some European leaders have pushed back against his reiterated threat to “open the doors” for 3.6 million refugees currently in Turkey to seek shelter in Europe if external powers don’t support his operation.
Italian Prime Minister Giuseppe Conte said European Union must adopt a common position against Erdogan’s threats. Conte told RAI television, as cited in Bloomberg:
“We cannot accept that there be blackmail involving the welcome given by Turkey” to refugees with European funding, and the offensive in Syria.
No doubt Erdogan won’t take kindly to the Italian leader charging him with an attempt the “blackmail” but Conte firmly voiced what many EU leaders are likely thinking.
* * *
As fighting ramps up in northeastern Syria following Turkey’s armed incursion into territory held by the Kurds, President Trump made clear during a press conference Wednesday night that, while Washington has threatened to punish Turkey for attacking the Kurds, President Trump doesn’t feel any deeper loyalty to the one-time “tip of the spear” in the fight against ISIS.
But President Erdogan wants Europe to understand that if it pursues sanctions or other punitive measures against Turkey – or even if European leaders complain too loudly – he won’t hesitate to release millions of Syrian refugees and allow them to start making their way to Europe, which is still struggling with the ramifications of the last wave of Syrian refugees.
According to BBG, Erdogan said he would “open the doors” for 3.6 million refugees currently in Turkey to seek shelter in Europe, should his country face criticism.
Erdogan’s threat comes as Turkish troops begin their advance into northeastern Syria (Erdogan has asked European leaders not to call this an ‘invasion’). So far, he has faced intense criticism from European nations and nearby Arab states.
The Turkish lira, and Turkish assets like stocks and foreign-currency bonds, have slumped in the wake of the invasion, with the Turkish currency trading near its weakest level since August.
Ankara has said the operation, which was given the green light by the US over the weekend, is intended to force back Kurdish militants along the border area while targeting ISIS militants. But since ISIS has been stripped of all its territory in the region, many who oppose the Turkish incursion believe the claims of going after ISIS and preventing the creation of a “terror corridor” are merely a ruse.
Turkish F-16 warplanes and artillery units have struck at least 181 targets so far. At least 19 Kurdish militants have been killed since the Turkish assault began, while 38 have been wounded. Meanwhile, a group of American senators from both parties have promised to try and punish Ankara over the incursion.
The anti-establishment Five Star Movement and center-left Democratic Party are headed to a deal on a new Italian government led by Giuseppe Conte. Bloomberg’s Maria Tadeo reports on “Bloomberg Surveillance.”
(GUA) Giuseppe Conte tells Italian Senate that far-right leader has triggered political crisis to serve his own interests
Giuseppe Conte has resigned as Italy’s prime minister after blasting Matteo Salvini, the leader of the far-right League, as an “opportunist” for triggering a government crisis that could have “serious consequences” for Italy.
Conte said he would formally resign his mandate to the president, Sergio Mattarella, after the close of the debate in the Senate on Tuesday.
The outgoing prime minister said that Salvini, deputy prime minister and interior minister, had betrayed Italian citizens after pulling the plug on the party’s tempestuous alliance with the anti-establishment Five Star Movement (M5S) earlier this month.
Salvini is eager to exploit the League’s growing popularity by bringing about snap elections.
“He is only looking after his own interests and those of his party,” said Conte. “Calling on voters every year is irresponsible,” Conte said, adding that the prospect of Salvini as Italy’s next prime minister was “worrying”.
By resigning, Conte has avoided a no-confidence vote sought by the League.
The power to dissolve parliament and call new elections rests with Mattarella, who could also seek the formation of a new parliamentary majority or install a technical government. The timing of Salvini’s manoeuvre is sensitive as Italy must present its draft budget for 2020 by the end of September.
Conte said Salvini’s choices in recent weeks revealed “poor institutional sensitivity” and “a serious lack of constitutional culture”. He also criticised the minister’s use of religious symbols in his constant campaigning across Italy, describing it is as “offensive to the faithful”.
Salvini kissed a rosary and retaliated in his response to Conte in the Senate, saying “I’ll ask the Madonna for protection for as long as I live”.
“I’m the only humble witness,” he added. “My country matters more to me than the comfy seats [of power]”.
He said that Italy’s most pressing problem is its low birth rate, adding that his potential government would be one that supports a €50bn budget for 2020 that focussed “on lowering taxes, the right to life…growth, investment.”
As prime minister, he would “focus on Italians, not on Merkel or Macron … I am proud, free and nationalist. Italy will be about children, who have a mum and a dad.”
If Mattarella does call new elections, then they would need to be held within 45 to 70 days.
Conte, who is usually mild-mannered, upped the ante against Salvini at the weekend, accusing him of disloyalty and being “obsessed” with closing off Italy’s ports to migrants. The row erupted after Conte refused to sign an order banning the Open Arms migrant rescue ship from docking in the island of Lampedusa.
Salvini was hoping his drastic move on 8 August to withdraw from the coalition would immediately collapse the government and bring about snap elections.
The League leader has since the May European parliamentary elections been seeking to capitalise on his party’s growing popularity: it is polling in first place at about 38%. Salvini’s party is much weaker in the Italian parliament following a third place showing behind M5S and the centre-left Democratic party (PD) in March 2018 elections, when it took 17% of the vote.
His strategy could be thwarted if M5S and the PD formed an alternative majority to guide Italy through the delicate budget period in the autumn. Matteo Renzi, a PD senator and former prime minister, is spearheading talks between factions of both parties. He told the Senate: “The populist experiment works well during an election campaign, less well when it comes to government.”
Nicola Zingaretti, the PD leader, is yet to embrace the potential partnership, with a source saying on Tuesday that his first choice is elections in order to avoid a move that Zingaretti described last week as a “gift to the dangerous right”. In a statement, Zingaretti said Conte’s words against Salvini are “to be appreciated … but there is a risk of self-absolution.”
Salvini has also signalled the possibility of patching things up with M5S in order to avoid the party’s tie-up with the PD. He again handed an olive branch to the M5S on Tuesday, by saying the parties could first approve a reform to cut the number of parliamentarians, as M5S wishes, before “immediately going to vote”.
In an interview with Radio 24 before Conte’s resignation, Salvini said: “What sense is a government against Salvini, with all inside? A government needs to be strong in order to get things done. Who would an M5S-PD executive represent?”
GENOA, Italy (Reuters) – Italian engineers on Friday blew up the looming remnants of a motorway viaduct in the northern city of Genoa whose collapse last August killed 43 people.
In a few seconds, the remains of the 1.2 km (1,300-yard) elevated road that had connected the port city with southern France fell to the ground with a roar, sending up clouds of cement dust and prompting scattered applause from onlookers.
Genoa mayor Marco Bucci said the controlled demolition had gone to plan, after a short delay to check on a report that someone might have been holed up in an abandoned apartment block nearby.
A section of the viaduct, built in the 1960s with reinforced concrete and strengthened in the 1990s, gave way on Aug. 14, sending cars and trucks hurtling 50 meters to the ground.
The explosions centered on two pylons holding up the surviving spans of the viaduct as cannons shot water over the 20,000 cubic meters of steel and concrete to prevent the clouds of dust engulfing the city.
The collapse made access to Genoa’s busy port more difficult and has also meant a lengthy detour for drivers heading to southern France.
The government of the anti-establishment 5-Star Movement and the right-wing League wants it rebuilt quickly, hoping to signal a departure from the corruption and inefficiency that have often plagued Italian infrastructure projects.
5-Star leader Luigi Di Maio and League chief Matteo Salvini, both deputy prime ministers, attended the demolition, after Infrastructure Minister Danilo Toninelli laid the first stone of the new viaduct earlier this week.
“Today not only the old bridge comes down, but the new one starts to rise,” Salvini said.
The reconstruction was assigned to the Italian firms Salini Impregilo and Fincantieri. Designed by the renowned Genoa-born architect Renzo Piano, the new viaduct is due to be inaugurated by the middle of next year.Slideshow (5 Images)
It remains unclear whether the government will keep its promise to revoke the concession of toll road operator Autostrade per l’Italia, a unit of infrastructure group Atlantia, which was in charge of the bridge’s maintenance.
Rome has accused the operator of neglecting the upkeep of the bridge. Autostrade has denied wrongdoing, saying regular, state-supervised inspections had indicated the viaduct was safe.
Fnancial experts warn that Italy’s proposed mini bills of Treasury are designed specifically by the League party to create a parallel currency that will ease Italy out of the eurozone. Matteo Salvini is deputy prime minister of the party.CreditRemo Casilli/Reuters
ROME — Even by the high standards of anxiety surrounding Italy’s troubled economy, the angst pervading the debate these days has taken on a markedly desperate air.
Italy’s nationalist government is again balking at the European Union’s demands to decrease its crippling debt. Its ministers are in open war over whether to cooperate. Almost daily, it seems, a new scheme is floated to scramble out of the deficit maze, as the country’s leaders try to keep their populist spending plans.
But one proposal has caused particular consternation and raised fresh concerns that Italy, the third largest economy in the eurozone, could explode the entire bloc. That land mine, critics say, is called the mini-BOT.
An acronym for Mini Bills of Treasury, the mini-BOT is an instrument similar to an IOU that its supporters believe will allow the cash-strapped Italian government to pay debts, stimulate the Italian economy and give Italians a way to pay their taxes.
But financial experts warn that the mini-BOT could create a parallel currency that will ease Italy out of the eurozone.
“It’s a first step to prepare EurExit, so I think it’s extremely dangerous,” said Riccardo Puglisi, associate professor of economics at the University of Pavia.
The mini-BOT has long been a glimmer in the eye of the euroskeptic League party of Italy’s de facto leader, Matteo Salvini. As often is the case, his coalition partner, the Five Star Movement, has followed his lead.
So far their government has only put the idea before the Italian Parliament in a nonbinding vote, which unanimously endorsed a proposal to study creation of “government bonds in small denominations” to speed up the paying of its debts.
But even that was enough to rattle investors and economists, as well as European Union officials, and to revive questions about the real intentions of the government, as well as its seriousness.
The introduction of a parallel currency is illegal under European Union law, and would threaten to bring the entire eurozone tumbling down because it would erode the very premise of the euro as a single monetary unit.
Supporters of the mini-BOT dispute that and say it is not legal tender, but only a way for the government to pay its debts — which would in any case, experts point out, increase Italy’s debt.
Many experts doubt the government truly intends to introduce the mini-BOT, which requires legislation by Parliament. Some said the proposal for study was introduced in such an underhanded way that they did not even know what they were voting on.
The euro remains popular in Italy. So many finance experts suspect that the government intends to use the threat of the mini-BOT as leverage in negotiations with Brussels.
But even that, they warn, could be disastrous.
“It would be like pointing a gun to your head and expecting the others to do what you say just because otherwise you kill yourself,” said Lorenzo Codogno, founder and chief economist of the consulting firm, LC Macro Advisors and the former chief economist at the Italian Treasury Department.
Italy’s economy minister, Giuseppe Tria, is seeking to work with Brussels, which this week is threatening to begin a process that could impose billions of euros in fines on Italy for not reducing its debt, forecast to rise to 135 percent of gross domestic product this year.
“I want to underline that there is no study of any measures aimed at the issuing” of mini-Bots, he told Parliament on Wednesday, trying to reassure Brussels and investors.
In the past, Mr. Tria has specifically dismissed the mini-BOTs. Mario Draghi, the president of the European Central Bank, the only eurozone institution authorized to issue money, has also dismissed them.
“They are either money — and then they’re illegal — or they’re debt, and then that stock goes up,” he said. “I don’t think there is a third possibility.”
But reality is often a hurdle Italy’s populists are willing to overcome.
While Mr. Salvini and other leaders of Italy’s populist government say they have no interest in leaving the European Union or euro, for years they made it seem as if they did.
Mr. Salvini used to wear shirts that read “No More Euro” and said in 2016 that he would leave the euro “tomorrow morning” and that everyone understood a vote for his party was a vote to leave the euro and return to a national currency.
One of his top economic advisers, and a father of the mini-BOT, the League lawmaker Claudio Borghi, has been equally explicit.
In a brochure entitled “MINI BOT: Democracy and Sovereignty,” he offered possible designs for the bills, decorated with various cathedrals and Italian personalities, including Orianna Fallaci, the Italian journalist who developed an antagonism to Islam, on the 20 mini-BOT bill. (Mr. Borghi’s own Twitter avatar shows his face on a 10,000 lire note.)
In a book discussing the mini-BOT, Mr. Borghi wrote that once the mini-BOTs were widely distributed in Italy, they would become a “‘spare tire that will make the possible changeover to our currency much easier.”
If Italy ever decided to leave the euro, as he hoped, it wouldn’t have to wait to print bank notes “because everything has already been done: on the day of the changeover, it will be sufficient to declare the mini-Bots new currency,” he wrote.
Mr. Borghi and his supporters, most notably Mr. Salvini, who seems to think the mini-BOTS could facilitate his delivery of income tax cuts at the center of his agenda, remain interested in the idea.
This month, Mr. Salvini said in a statement that the economy ministry needed to understand that it was “urgent” that the government pay its debts to suppliers. “It is a question of justice,” he said.
Supporters of the mini-BOT believe it provides a quick way for the Italian government to pay its debts to commercial businesses with short term, no-interest bonds secured on future tax revenues.
But since Italians could also use the instrument to pay taxes, its worth would be on par with the euro, increasing the likelihood that Italians would trade them like money. That would mean more business for Italian shops and the Italian economy, while not technically putting more currency in the market.
Supporters believe the mini-BOTs would prevent a run on the Italian banks if the country ever left the euro, because it could automatically switch over to the new currency.
Economists say there is a lot wrong with that picture, but Mr. Puglisi said it also ignored that people are rational and would see the writing on the wall and move their money out of Italian banks the moment mini-BOTs hit the market and before they were stuck with a devalued currency.
That, and the assurances of Italy’s economy minister, has helped settle some anxieties about the imminence of the mini-BOT. For now.
“It’s quite possible that at some point Italy enters a crisis and has no choice but to restructure the debt,” Mr. Codogno said. “Then at that point, there might be a temptation by the government, “O.K. let’s forget about the euro.’ ”
The Commission said that in its latest assessment of member states’ compliance with deficit and debt rules, it had concluded that when it comes to Italy “a debt-based EDP is warranted.”
An EDP stands for an “Excessive Deficit Procedure” and is an action launched by the European Commission against any EU member state that exceeds the budgetary deficit ceiling or fails to reduce their debts.
(From L) Italy’s Deputy Prime Minister and Minister of Economic Development, Labour and Social Policies, Luigi Di Maio, Italy’s Prime Minister, Giuseppe Conte and Italy’s Deputy Prime Minister and Interior Minister, Matteo Salvini on October 15, 2018.NurPhoto | NurPhoto | Getty Images
The European Commission, the EU’s executive arm, announced Wednesday that disciplinary proceedings against Italy are warranted because it’s breaking fiscal rules over its rising public debt.
The Commission said that in its latest assessment of member states’ compliance with deficit and debt rules, it had concluded that when it comes to Italy “a debt-based EDP is warranted.”
An EDP stands for an “Excessive Deficit Procedure” and is an action launched by the European Commission against any EU member state that exceeds the budgetary deficit ceiling or fails to reduce their debts.If an EDP went ahead, Italy could face a fine of around 3 billion euros ($3.4 billion), according to some reports.
”(The report) concludes that the debt criterion is not complied with and thus a debt-based excessive deficit procedure is warranted,” Valdis Dombrovskis, the EU Commission vice-president for the euro and social dialogue, said at a press conference.
“To be clear, today we are not opening the EDP. First, EU member states have to give their views on … the report then the economic and financial committee has two weeks to form its opinion on our conclusions. But it’s much more than just about the procedure, when we look at the Italian economy we see the damage that recent policy choices are doing.”
Worryingly for the Commission, Italy (Europe’s third-largest economy) has the second-highest debt pile in the EU (expected to reach 133.7% this year) and was asked to explain why its debt had risen in 2018.
Dombrovskis said the Commission estimated that Italy’s spending to service its debts in 2018 turned out to be 2.2 billion euros higher than expected in its 2018 spring forecast. He added that the country pays as much toward its debt servicing as it does toward its entire education system.
“Growth has come to almost a halt … and we now expect the Italian debt (to GDP) ratio to rise in 2019 and 2020 to over 135%,” he said.
Italian banking stocks fell 1% on the announcement Wednesday and the country’s bond prices (the amount investors will pay to hold Italian debt) also declined, signaling a drop in risk appetite toward the country.WATCH NOWVIDEO01:54Euro zone is an unstable economic region, strategist says
The Commission presented what is known as its Semester 2019 Spring Package on Wednesday which amounts to 27 country-specific recommendations which set out the Commission’s economic and social policy guidance for member states for the next 12 to 18 months.
Italy’s coalition government — a fractious alliance between the euroskeptic Lega party and anti-establishment Five Star Movement — has been on a collision course with the European Commission since it announced its 2019 budget plans which foresaw the coalition increasing spending and breaking a budget deficit target previously agreed by the former government.
The coalition initially agreed to lower its deficit target, to 2.04%, but then revised this upwards again.
The friction has put Economy Minister Giovanni Tria in a tricky position trying to navigate between Lega and M5S leaders’ demands for more spending and the Commission’s demands for less. He promised the Commission that the 2020 budget would be compliant with the Commission’s rules.
It’s likely that the EU will want to avoid launching punitive measures against Italy given concerns over rising euroskepticism in the country. EU Commissioner Pierre Moscovici said Wednesday that the “door remains open to avoid a disciplinary procedure against Italy.”
Italy’s Prime Minister Giuseppe Conte (who does not belong to either the Lega party or M5S) said he would do his utmost to avoid any EU procedure, Reuters reported.
Earlier on Wednesday, however, the Lega party’s economic chief Claudio Borghi said the party would not accept any tightening measures this year and that Tria must take “a hard line on EU budget talks,” Reuters said. Whether that bullish stance will continue in the face of potential punishment from the EU remains to be seen.
BRUSSELS (Reuters) – Italy’s deteriorating public finances will break European Union rules this year and next unless Rome alters its policies, but the EU executive is split on how to best handle the case of the euro zone’s third-biggest economy, EU officials said.FILE PHOTO: Italy’s Prime Minister Giuseppe Conte (L) meets European Commission President Jean-Claude Juncker at his arrival at the European Parliament in Strasbourg, France, February 12, 2019. REUTERS/Vincent Kessler/File Photo
The European Commission is closely watching Italy because of the country’s huge public debt, the second highest in Europe after Greece, which the Commission forecasts will rise this year and next instead of falling as EU rules dictate. Italy’s budget deficit is to rise too, against the rules, while growth stalls.
Yet outspoken Italian Deputy Prime Minister Matteo Salvini, whose right-wing League party is in government with the populist 5-Star movement, said the country was ready to break EU fiscal rules — remarks that sent the euro lower.
Italian and other politicians across the 28-nation bloc have sharpened their rhetoric ahead of elections to the European Parliament being held in all EU countries on May 23-26.
“The Commission is split on Italy — there are those like Vice President Valdis Dombrovskis who want harsher action and those, like Economic Commissioner Pierre Moscovici, who push for dialogue and compromise,” one EU official said.
The tougher course would be EU disciplinary steps that could end in fines, something Italy avoided last December through a deal in which the EU forgave Rome its consolidation obligations and which the Commission called “not ideal” and “borderline”.
But since December, Italy’s economic data and outlook have only become grimmer, increasing investor worries about Rome’s ability to service its obligations.
“We’re very cautious on Italy right now,” said Mohammed Kazmi, a portfolio manager for UBP in Geneva.
“What we’re seeing in the past few days from the Italian cabinet is that instead of calming the fears of the European Commission following its deficit forecasts, Salvini talked about how he’s willing to go ahead with a VAT cut.”
SHOWDOWN ON JUNE 5
The Commission will issue a report on Italian public finances on June 5 that could conclude with a call for disciplinary steps to start. The final decision will fall to Commission chief Jean-Claude Juncker, who has in the past tended to side with Moscovici, officials said.
France, Portugal and Spain all avoided being fined for breaking EU rules thanks to that approach. Some officials said Juncker, who will leave the Commission in October, would stick to his lenient stance and leave the issue to the next EU executive.
“It will be legacy time: will Juncker want to end his term with the opening of the first debt-based EDP (Excessive Deficit Procedure) for Italy, a procedure that it will be very difficult to get out of once launched, and which he fought hard to avoid as recently as December? Probably not, but who knows,” a second official with insight into the Commission’s thinking said.
Being tough on Italy would be hard for Juncker, the official said. “That would go against the instincts he has demonstrated in recent years which are more like Moscovici’s — dialogue over confrontation on these matters,” the second official said.
Pressure from markets could play a role — Salvini’s remarks drove Italy’s 10-year bond yield to two-month highs of 2.755%, up 6 basis points on the day, while shorter-dated two-year and five-year yields rose 8 bps each on Tuesday.
The closely-watched spread between 10-year Italian and German bond yields hit its widest level in three months, at 282.6 basis points.
Latest Commission forecasts show that Italian debt will rise this year to 133.7% of GDP from 132.2% in 2018. Next year it will go up even further, to 135.2% of GDP.
This is in violation of EU rules, under which Italy’s debt should be falling every year by 1/20 of the difference between the present level and the 60% ceiling permitted by EU treaties, calculated as an average over three years.
Of even more concern to investors, the Commission expects that Italy’s primary balance, the amount of money the government has before debt servicing costs, is to drop to 1.2% of GDP this year from 1.6% in 2018 and tumble to only 0.2% in 2020, a worrying sign for a country with a large public debt.
All this as Italy’s economic growth is forecast to almost grind to a halt this year, after being revised down from the 1% expansion that the December compromise was based on.
Two weeks ago, somewhat out of the blue, ECB President Mario Draghi issued an odd statement confirming that the European Central Bank needs to approve any operation in the foreign reserves of euro zone countries, including gold and large foreign currency holdings.
“The ECB shall approve both the operations in foreign reserve assets remaining with the NCBs (national central banks)…and Member States’ transactions with their foreign exchange working balances above a certain threshold,”
“The purpose of this competence is to ensure consistency with the exchange rate and monetary policy of the Union.”
Specifically, Draghi made this statement to two Italian members of the European Parliament.
At the time it did not seem notable for any reason other than its peculiar timing, but now things are starting to make more sense as The Wall Street Journal reports that Italy’s ruling populists pushed ahead this week with efforts to seize control of the central bank and its gold reserves.
Complaining that hundreds of thousands of small individual investors lost billions of dollars after several Italian banks failed in recent years, the anti-establishment ‘5 Star Movement’ and the nationalist ‘League’, depict the central bank as a symbol of a technocratic elite aloof from the needs of ordinary Italians.
“We need a change of course at the Bank of Italy if we think about what happened in the last years,”said Deputy Prime Minister Luigi Di Maio, leader of the 5 Star Movement.
Five Star and the League have repeatedly attacked the Bank of Italy for not preventing the banking crises, and blamed it for the losses suffered by mom-and-pop savers who had bought bank shares and bonds.
“If you are here with your current account in the red, it’s because the people who were supposed to control things didn’t do so,” League’s leader, Interior Minister Matteo Salvini, told a group of former investors in Banca Popolare di Vicenza, which was liquidated in 2017.
And this week saw Italian lawmakers from 5 Star asking Parliament to pass two draft laws:
One law would instruct the central bank’s owners, most of them private banks, to sell their shares to the Italian Treasury at prices from the 1930s.
The other law would declare the Italian people to be the owners of the Bank of Italy’s reserve of 2451.8 metric tons of gold, worth around $102 billion at current prices.
As The Wall Street Journal notes, such a move could in theory widen the scope for selling the gold and reduce the bank’s reserves, which help underpin the financial system…
“The gold belongs to the Italians, not to the bankers,” said Giorgia Meloni, leader of the Brothers of Italy, a far-right opposition party that supports both bills. “We are ready to battle everywhere in Italy and to bring Italians to the streets if necessary.”
The establishment sees it differently, warning that their actions are an attempt to undermine the Bank of Italy’s independence, and to spend the nation’s gold reserves on populist policies.
“Gold is part of the assets of the Bank of Italy and can’t be used for monetary financing of the Treasury,” said Bank of Italy Governor Ignazio Visco.
“This looks like revolutionary expropriation,” said Gianluca Garbi, chief executive of Banca Sistema SpA.
But as The Wall Street Journal concludes, the 5 Star Movement and the League support public ownership of the gold reserves, and with backing from parties comprising 60% of lawmakers, the draft law has enough support to pass. Lawmakers from 5 Star also support nationalizing the central bank, while the League hasn’t decided yet, leaving the bill short of a majority with around 40% support.
As of last week they had forced the creation of a parliamentary commission to look into the failure of Italian banks, launching what could be months of tense scrutiny.
Is it any wonder, Russia (and China) have started to horde gold?
Xi Jinping’s signature foreign policy aims to build China’s soft power through infrastructure development overseas. The FT’s global China editor James Kynge explains the significance of getting Italy’s backing
De acordo com o ‘Financial Times’, a Itália deverá juntar-se a Portugal na mega-iniciativa internacional Belt and Road, uma vez que, ao que tudo indica, apoiará formalmente o projecto chinês tornado público em 2013. O subsecretário do ministério italiano do Desenvolvimento Económico, Michele Geraci, revelou que Roma assinará um memorando de entendimento de apoio à iniciativa.
Itália segue rumo de Portugal e prepara-se para assinar memorando
A iniciativa pretende conectar o sudeste Asiático, Ásia Central, África e Europa, numa rede infra-estrutural, logística e portuária complementar, interligada e multi-facetada, capaz de agilizar tráfegos de cargas e tornar mais fluído o fluxo comercial entre o Ocidente e o Oriente. O Presidente chinês, Xi Jinping visitará a Itália em Março, devendo assinar, aí, o documento.
«As negociações ainda não terminaram, mas é possível que sejam concluídas a tempo para a visita de Xi Jinping», disse Geraci, citado pelo Financial Times. «Queremos ter a certeza de que os produtos feitos em Itália podem ter mais sucesso em termos de volume de exportação para a China, que é o mercado que mais cresce no mundo», comentou Geraci.
Steven Bell, economista-chefe da BMO Global Asset Management, elogia a estabilidade portuguesa, num contexto de incerteza na Europa. Mas alerta que em vez de boom económico, é apenas recuperação.
O pessimismo quanto à desaceleração económica global atingiu um pico e a realidade vai acabar por ser menos negativa que o esperado, na opinião do economista-chefe e gestor de soluções multi-ativos da BMO Global Asset Management. Em entrevista ao ECO, Steven Bell explica que a estabilidade e o crescimento acima da média da Zona Euro em Portugal tornam o país mais atrativo para investidores estrangeiros. A preocupação da Europa é, no entanto, Itália, numa altura em que existem problemas políticos nas quatro maiores economias da Zona Euro.
A desaceleração na economia global parece ser uma das principais preocupações atuais dos mercados. Como vê os constantes avisos por parte do Fundo Monetário Internacional (FMI), Comissão Europeia, bancos centrais e outras instituições?
É certo que estamos perante uma desaceleração económica global e com certeza há preocupações, mas há uma série de razões pelas quais a economia mundial continuará a expandir-se e a principal é a inflação, que está no ponto certo: nem muito alta, nem muito baixa. Não é como há três ou quatro anos, quando muitos se preocupavam com a deflação. Ninguém está preocupado com a deflação agora. Mesmo no Japão, os preços estão a subir. As únicas exceções são países onde a moeda caiu muito, como a Venezuela. Em quase todos os países, a inflação não é um problema, o que é uma grande vantagem.
Mas na Zona Euro, a inflação continua a não atingir a meta de 2% do Banco Central Europeu (BCE)…
A inflação é muito baixa na Zona Euro e no Japão. Não consegue chegar a 2%, mas está mais perto e penso que alcançámos o ponto mais baixo para as expectativas de crescimento europeu. O FMI, a Comissão Europeia, todos os bancos de investimento cortaram as previsões… Para a economia mundial como um todo, o importante é que a China tem estado a desacelerar, mas a ajustar-se e começa a divulgar dados um pouco melhores. Na Europa, penso que veremos um ponto de viragem nas expectativas e os dados a melhorarem um pouco. Acredito que, este ano, o crescimento será igual ou até um pouco melhor do que as projeções.
Então não há razões para começar a pensar numa recessão?
Não vejo uma recessão. As condições financeiras estão facilitistas e os estímulos estão a tornar-se mais ligeiros, principalmente na China. A China está numa fase de desaceleração estrutural porque chegou à meia-idade e tem um grande problema de crédito. É um caso único: um grande país com um governo comunista que persegue políticas capitalistas. Como a Coreia e o Japão antes deles, cresceram muito rapidamente e, quando os agregados familiares alcançaram um rendimento de sete mil dólares ao ano, desaceleraram. Têm problemas, mas vão continuar a crescer a um ritmo razoável.
Esse ajustamento é uma ameaça à economia global? Qual é o impacto da guerra comercial nestas mudanças?
O ajustamento desacelerará e mudará o crescimento chinês, que tem sido impulsionado pelas exportações. Penso que vai passar a ser mais doméstico. O país não é um exportador de serviços e, no entanto, os serviços representam uma grande parte da economia, maior até que a indústria. É o próximo estágio de desenvolvimento. Já não é barato produzir na China… A grande guerra comercial com os Estados Unidos não é sobre comércio, é sobre poder global. É sobre quem é o país dominante militarmente, estrategicamente e tecnicamente. Penso que é uma questão diferente das negociações comerciais. Mas, embora seja estatisticamente negativo, a realidade é que Donald Trump precisa de um acordo comercial e a China também. Irão encontrar alguma saída, mas até lá a batalha continua.
Sobre a saúde da economia global, penso que a China vai ajustar-se e a Europa vai continuar com um desempenho ligeiramente melhor que o esperado. No resto do mundo — excluindo os EUA –, o pessimismo já atingiu o pico.Steven Bell
Economista-chefe da BMO Global Asset Management
Considera que existe o risco de uma onda global de protecionismo?
Sim. Infelizmente, temos de falar um pouco sobre o Brexit… A Europa sem o Reino Unido será mais protecionista. Penso que temos este belo mercado único, que é muito bem-sucedido e liberal. Há mais pressões a favor do protecionismo e a realidade é que as tarifas são muito baixas, mas grande parte do comércio não é industrial, mas serviços. Portanto, existem barreiras e restrições não tarifárias que são mais atraentes que as tarifas porque são mais fáceis de serem impostas.
Voltando à saúde da economia global, penso que a China vai ajustar-se e a Europa vai continuar com um desempenho ligeiramente melhor que o esperado. No resto do mundo — excluindo os EUA –, o pessimismo já atingiu o pico. Na realidade, é um pouco dececionante na Europa… O emprego está em máximos em países como Portugal, que passaram por momentos terríveis e dos quais estão a recuperar. Mas não é um boom, é uma recuperação e é dececionante… Temos que olhar para fatores como a demografia ou o desejo de ter uma rede de segurança na economia, que significa maior regulação e maiores restrições. É compreensível, mas restringe o crescimento. É o modelo europeu e penso que será o futuro: crescimento mais lento, pleno emprego e inflação que demora a subir.
O que causa este crescimento dececionante?
Há vários fatores especiais na Europa. Entre eles está o rio Reno, que é uma enorme faixa de transporte e não foi possível movimentar barcos devido ao verão muito quente. Há produtos, como os químicos, que não podem ser movidos por estrada, de modo que a produção industrial foi prejudicada. Além disso, os preços da energia não caíram quando os preços do petróleo o fizeram, portanto agora veremos uma recuperação. Da mesma forma, os coletes amarelos na França prejudicaram realmente a economia. Foi o PMI [índice de gestores de compras] mais baixo em qualquer país desenvolvido, mas vai recuperar.
Têm sido fatores temporários. Temos de ver se as reformas de Emmanuel Macron continuarão. O presidente francês acabou de dar arrancar com estímulos orçamentais, mas não reverteu realmente as reformas e, se conseguir continuar, será positivo.
Para isso, Macron tem de encontrar formas de financiar as reformas…
Sim… Mas teremos eleições para a Comissão Europeia e o que se passa com os défices orçamentais é que quando foi com Portugal, houve palavras muito fortes, mas quando é França ou a Alemanha, é uma história muito diferente. A Comissão Europeia é muito boa a fazer bullying… E o último grande país que ameaçaram foi Itália porque tem um Governo fora do comum. Itália nunca teve a força que o seu tamanho económico determinaria. Não sei porquê… Talvez devido a muitos Governos e fracos. Há um novo governo a cada ano. Não sei porque é que Itália nunca foi tão forte quanto deveria ser, mas em termos de défice orçamental, penso que não haverá grandes mudanças. Existe a possibilidade de a Alemanha se tornar um pouco mais expansionista, mas todos os países têm problemas políticos reais. Todos os países estão fracos, sem exceções.
Portugal também está nesse grupo de países com problemas políticos?
Exceto Portugal, talvez. Portugal é diferente. Teve muitos problemas políticos, mas não, a situação não é especialmente difícil neste momento. Estava a pensar em França, Alemanha, Espanha e Itália. Em termos de fatores económicos, há outra questão: as mudanças nas emissões [de dióxido de carbono] e a transição para carros elétricos são ameaças reais para a indústria automóvel da Alemanha. A Alemanha enfrentou muitos desafios e este é outro. A transição não é impossível, mas será difícil. Portanto, penso que a Europa não está assim tão mal: crescimento lento, mas a melhorar.
As estimativas da Comissão Europeia projetam que a economia portuguesa cresça mais rápido que a Zona do Euro durante, pelo menos, dois anos. Concorda?
Sim. Portugal fez ótimos ajustamentos, é uma economia aberta e o maior parceiro comercial está mesmo ao lado. Quando Espanha estava em recessão, exportou-a. Mas agora tanto Espanha como Portugal estão bem. Não há nenhuma crise grave que eu consiga ver, portanto a perspetiva é positiva para Portugal, como uma das economias em crescimento mais forte. Mas não é um Portugal em expansão, é apenas um crescimento modesto. Simplesmente, o resto da Europa é tão fraco que Portugal será uma das economias que mais crescem este ano.
Portugal torna-se, por isso, mais atraente para investidores internacionais?
Sim. Penso que é mais interessante. A maioria dos investidores estrangeiros vê a Europa como um todo e escolhe uma região que funciona. Penso que há muito interesse em Portugal, que é muito atrativo devido à sua estabilidade, comparativamente a outros países e olhando para o que aconteceu no passado. Parece-me um país muito interessante para investidores estrangeiros.
Os elevados níveis de dívida pública não são um risco?
Não, não penso dessa forma. A dívida é um problema para quem tem dívida em moeda estrangeira — e é claro que Portugal não imprime euros –, mas não tem um grande problema na conta corrente. Não considero que a dívida seja um problema e penso que não é aí que está o foco. As taxas de juro estão tão baixas que não há problemas com a gestão da dívida. Se houver uma crise, já é uma história diferente… Mas isso parece-me distante.
Considera que Portugal está preparado para a redução dos estímulos na política monetária?
Portugal está em ótima forma. Os fundamentais estão a melhorar… o país com que há preocupações é Itália. O problema em Itália é que não há crescimento. Não são os bancos e não é a dívida, é que não há crescimento. Tivemos reuniões com os principais analistas da Standard & Poor’s e da Moody’s para a Europa e ambos concordaram que o problema é o crescimento. O facto de Itália ter tido dois trimestres de crescimento negativo e PMI muito baixos penalizou a confiança.
Mas penso que a perspetiva para Itália é um pouco melhor, porque irão definitivamente beneficiar de preços mais baixos de petróleo e do facto de o défice orçamental já não ser exatamente o problema que era. Mas esse número [do défice] mostrou a fraqueza na Itália e prejudicou o mercado de obrigações, o que é uma pena. Portanto penso que Itália é o principal país que vai debater-se com o aperto da política monetária. Não é Portugal. As taxas de juros estão incrivelmente baixas para Portugal e o país está em boa forma para resistir a uma subida sem nenhum problema. Sem ser demasiado otimista — porque não é um boom –, a perspetiva é bastante positiva.
O problema em Itália é que não há crescimento. Não são os bancos e não é a dívida, é que não há crescimento. Tivemos reuniões com os principais analistas da Standard & Poor’s e da Moody’s para a Europa e ambos concordaram.Steven Bell
Economista-chefe da BMO Global Asset Management
Se a economia portuguesa está em recuperação, mas não num boom, quando podemos esperar esse boom?
Não vejo um boom… Mas vejo melhorias graduais na economia.
As próximas eleições legislativas, em outubro, também não serão um problema?
Eu hesito muito em comentar eleições de qualquer país, depois das surpresas que tivemos em países que conheço muito bem… Vou esperar e ver o que os portugueses decidem. A estabilidade é uma boa notícia, mas as sondagens dizem várias coisas diferentes. Veremos o que acontece…
Falou de surpresas em países que conhece. Está a referir-se ao Brexit? Qual é a sua expectativa para esse processo?
O Brexit é uma confusão… Quando falo com pessoas que estão muito próximas das negociações dizem-me que a primeira-ministra não faz ideia do que vai acontecer. O líder da oposição não faz ideia do que vai acontecer. Portanto, eu não faço ideia. É uma confusão. Qualquer cenário parece complicado de resolver. Se formos positivos e assumirmos que conseguiremos um acordo, então será passado e sairemos suavemente. Mas, ainda assim, teremos de negociar o nosso relacionamento com a UE, o que vai ser um pesadelo e a incerteza vai continuar.
Não há nada de positivo para a economia do Reino Unido depois do Brexit. Mas continuaremos e seremos a mesma economia amanhã como somos hoje. Vamos crescer e vamos continuar. As coisas vão mudar, haverá um ambiente económico menos positivo após o Brexit, mas não é um desastre. Não é o fim do mundo… As pessoas deixam-se levar, às vezes. Não sei se vamos conseguir um acordo, um atraso ou até mesmo um segundo referendo. Não é provável, mas é praticamente possível. Todos os cenários estão abertos. O meu melhor palpite é que conseguiremos um acordo e que a Irlanda tem muito a perder com um Brexit sem acordo. Penso que vão acabar por ceder.
The European Commission on Wednesday said Italy’s excessive economic imbalances poses a risk to the countries inside the eurozone. “Italy is experiencing excessive imbalances. High government debt and protracted weak productivity dynamics imply risks with cross-border relevance, in a context of still high level of non-performing loans and high unemployment,” said the EU executive.
Reports govt considering using reserves to avert VAT hike
(ANSA) – Rome, February 11 – Deputy Premier and Interior Minister Matteo Salvini said Monday that the Bank of Italy’s gold reserves are “the property of the Italian people, not of anyone else”. He was commenting following reports that the government was considering using the central bank’s gold to avert a rise in value-added tax that is scheduled to kick in unless alternative sources of budget coverage can be found.
European Commission will issue new forecasts later in the day
Italy’s poverty rates elevated, public debt ‘very high’: IMF
The European Commission is expected to slash the Italian economic growth estimate for this year when it releases new forecasts later Thursday, major newspapers including Il Messaggero and la Repubblica reported.
The forecasts will follow separate IMF criticism the day before that the Italian government is falling short on needed reforms.
The Commission will probably cut the Italian growth estimate to 0.2 percent from the 1.2 percent foreseen in November, according to Messaggero and Repubblica. Lower growth will make it more difficult for the populist coalition to carry out its expansive spending plans.
The Washington-based International Monetary Fund on Wednesday issued a report on the 2018 review of Italy less than a week after the national statistics office said the country fell into recession at the end of last year.
“The authorities’ strategy falls short of comprehensive reforms needed to address the longstanding structural impediments to sustained growth and, therefore, risks leaving the economy vulnerable,” the International Monetary Fund said Wednesday at the end of its consultations.
The populist government that took office on June 1 is implementing an expansive spending program that includes income support for the poor and a lower retirement age.
Finance Minister Giovanni Tria said the IMF report “underestimates the necessity to support growth in Italy and in Europe, and the role of the policies adopted by the government toward this goal.”
Tria said in a statement Wednesday evening that the government is committed to reducing the debt and there is no cause for alarmism and “no intention to destabilize the markets.”
The ruling coalition expects 1 percent growth this year, while the country’s central bank and the IMF in separate reports have estimated 0.6 percent for 2019.
Growth is projected to stay below 1 percent annually for five years, ending 2023 at 0.6 percent, the IMF said.
The IMF noted that the economy has been “recovering modestly” from the financial and sovereign debt crises.
Intesa Sanpaolo CEO Carlo Messina struck an optimistic note in an interview with Bloomberg Television on Wednesday.
“I think that in the second part of the year, we can have a clear recovery due to internal demand acceleration,” the Italian banker said in an interview with Bloomberg’s Nejra Cehic. “My expectation is that we can have a recovery in the exports in the second part of the year.”
Italy approved a compromise budget in late December following weeks of wrangling with the European Commission that spooked investors and sent yields on 10-year government bonds soaring to 3.81 percent on Oct. 19. They have since fallen to about 2.8 percent from the 4 1/2-year high.
“Weak profitability and sustained high sovereign yields pose challenges to the banking system,” according to the IMF’s Article IV report.
The fund welcomed the government’s goal of reducing Italy’s public debt, which at more than 130 percent of gross domestic product is the second-highest ratio in the euro area after Greece.
“Spillovers from heightened stress in Italy would be global and significant,” the IMF staff said in an accompanying report dated Dec. 18.
“Acute stress in Italy could push global markets into uncharted territory, for example, if there were to be an unprecedented downgrade to junk status of a very large advanced sovereign issuer,” the staff report said. “Given that Italian debt is held widely, a broad-based reversal of portfolio flows could occur, including from emerging markets. The impact could be large within the euro area.”
Output in Europe’s fourth largest economy contracted 0.2% in the fourth quarter, on the heels of a 0.1% drop in the quarter before that.
This means Italy is officially in recession, which is defined as two successive quarters of economic contraction.
Istat cited a “decrease of value added in agriculture, forestry and fishing as well as in industry and a substantial stability in services.”
It’s not just Italy. Industrial production throughout the whole of the eurozone slumped into the end of 2018.
It’s official: Italy is in a recession.
Output in Europe’s fourth largest economy contracted 0.2% in the fourth quarter, on the heels of a 0.1% drop in the quarter before that, statistics agency Istat saidon Thursday. (A recession is defined as two consecutive quarters of negative growth.)
Istat cited a “decrease of value added in agriculture, forestry and fishing as well as in industry and a substantial stability in services. From the demand side, there is a negative contribution by the domestic component (gross of change in inventories) and a positive one by the net export component.”
Manufacturing was a warning sign
Italy’s manufacturing sector has bombed out in recent months, with both survey and official data showing a continued contraction at the end of 2018.
Andrew Harker, an associate director at IHS Markit, which compiles PMI, said on January 2 that the manufacturing slump was a “worrying end to the year for Italian manufacturers, with firms continuing to struggle to secure new business.”
“This is in marked contrast to the start of 2018, when the sector was experiencing strong growth,” he added. “With business confidence at a six-year low, there appears little sense of optimism that the current soft patch will come to an end in the near future.”
While the budget crisis that gripped Italy in the second half of 2018 seems to finally have a solution, the country’s government is volatile and highly euroskeptic, so the country is teetering on the edge of yet another political crisis.
The Italian ambassador to France was summoned Monday to explain comments by Italian deputy PM Luigi Di Maio. The leader of the Five Star Movement blamed French policy on colonial-era French African currencies for holding back development. “If people are leaving today it’s because European countries, France above all, have never stopped colonising dozens of African countries,” said Di Maio. French diplomatic sources called it “hostile and without cause”.
North Korea’s ambassador to italy has disappeared, reports the BBC, citing comments reportedly made by South Korea’s spy agency. The news follows unconfirmed reports that the diplomat, Jo Song-gil, had sought asylum from an unidentified Western country.
Jo, the 48-year-old son and son-in-law of high-ranking North Korean diplomats, fled the Rome embassy over a month ago with his wife according to government MP Kim Min-ki.
“Acting ambassador Jo Song-gil’s term was ending in late November last year and he escaped the diplomatic compound in early November,” Min-ki said.
Jo’s father-in-law Lee Do-seop was a well-known ambassador to Thailand and Hong Kong. He has been acting ambassador in Rome since October 2017 following the expulsion of then-ambassador Mun Jong-nam amid a North Korean nuclear test a month prior.
The last North Korean senior diplomat to defect was the deputy ambassador to London, Thae Yong-ho, who abandoned his post in 2016 and took his wife and children to South Korea.
As one of the highest-ranking officials to ever defect from the North, his move was seen as a blow to Kim Jong-un’s regime. He would go on to urge the world to spread information in North Korea to undermine Mr Kim’s status among his people. –BBC
South Korea’s National Intelligence Service – which is responsible for interrogating North Korean defectors, told lawmakers that they have not heard from Jo Song-gil since early last month, and would not confirm that he was trying to defect to another country.
Italy’s foreign ministry, meanwhile, told the BBC that they have no record of an asylum request from Jo.
Diplomatic sources said the last Italy heard of him was when officials received a note last year from the North Korean government saying that Mr Jo was being replaced.
South Korean newspaper JoongAng Ilbo has reported that Mr Jo is in a “safe place” with his family, citing a diplomatic source. –BBC
To manage the fallout of high-profile defections, North Korean media has often insisted that any diplomats defecting are part of a South Korean or US plot to undermine its government. They are branded traitors, and any family they may have left behind can face severe consequences.
Thae Yong-ho, the former North Korean diplomat to London, has told South Korean reporters that he worked with Jo Song-gil, claiming that Jo was responsible for delivering luxury goods to North Korea through an Italian company, and that he may know more about Pyongyang’s nuclear plans.
The European Commission decided against launching a disciplinary procedure against Italy over its budget after the country’s populist government pledged to rein in its spending. Italian assets rallied.
Following a meeting of its top officials, the commission, the EU’s executive arm, concluded that concessions by Italy on its budget meant the country didn’t warrant a triggering of the so-called excessive deficit procedure that could eventually lead to financial penalties.
“Intensive negotiations over the last few weeks have resulted in a solution for 2019,” Commission Vice President Valdis Dombrovskis told reporters in Brussels on Wednesday. “Let’s be clear, the solution is not ideal but it avoids opening the excessive deficit procedure at this stage and it corrects the situation of serious non-compliance.”
Italian 10-year bond yields fell as much as 18 basis points to 2.75 percent, the lowest level in over three months while the FTSE MIB index of shares rallied as much as 1.8 percent with banking stocks leading gains.
The decision comes after weeks of negotiations between Italian and EU officials and caps a months-long tussle with Brussels that roiled markets. It also marks a climbdown for the country’s firebrand populist leaders, who rose to power with expensive election promises including a lower retirement age and more welfare benefits.
Brussels and Rome met each other half way for the compromise to be reached, as Italian populists held off on their most ambitious spending plans, while the Commission turned a blind eye on Italy’s failure to comply with the obligation to lower its structural deficit next year — which excludes one-off expenditures and the effects of the economic cycle.
As part of the deal, Italy cut its deficit target for next year to 2.04 percent of gross domestic product and shaved about 4 billion euros ($4.6 billion) off its spending plans. Rome’s initial plan for a deficit of 2.4 percent was rejected by officials in Brussels because it was in breach of the EU’s budget rules, while analysis by the commission last month suggested that the deficit would actually be close to 3 percent.
While far from what the EU had hoped, the deal is a relief for EU officials, who had fretted for months over the possible impact a prolonged budget standoff could have on the country’s finances and the euro-area economy.
“The composition of the announced measures and the budget overall still raise concern,” Dombrovskis said, adding that Italy urgently needed to restore confidence in its economy and put its debt on a downward path.
Discussions were further complicated by measures taken by the French government to calm the Yellow Vest protests, which will likely push the country’s budget deficit over EU limit next year. The move by France gave rise to complaints from Rome that Paris gets special treatment when it comes to its budget.
European Affairs Commissioner, Pierre Moscovici speaks during a joint press conference with Italy’s Minister of Economy and Finances following their meeting at the Economy Ministry on October 18, 2018 in Rome, Italy.
The European Union announced it will look to sanction Italy with a fine after the country refused to submit a budget proposal that squares with its rules.
Italy’s populist and partly right-wing coalition wants to increase the country’s deficit to 2.4 percent of annual economic output in 2019, as it looks to make good on pre-election spending pledges. A previous Italian government had submitted a 2019 budget which would have recorded a deficit of just 0.8 percent.
In a statement, the European Commission — the EU’s legislative arm — said: “With regret, that today we confirm our assessment that Italy’s draft budget plan is in particularly serious non-compliance with the Council recommendation of 13 July.”
The Commission said that as Italy’s spending for 2019 didn’t comply, commissioners would now open a “debt-based Excessive Deficit Procedure (EDP).” The European Union member states now have two weeks to decide if they agree that an EDP against Italy is warranted. If so, the Commission will prepare a document that asks Italy how it will remedy its budget plan to abide with the EU rules. Should Rome ignore that, then officials in Brussels could sanction Italy with fines.
Speaking to CNBC’s Silvia Amaro on Wednesday, Vice President of the European Commission, Valdis Dombrovskis, said it was the EU position that Italy’s budget plan would risk more austerity for Italians in the future.
“Instead of that fiscal stimulus that the government is hoping for, (we expect) there is a further slowdown of the economy,” he said before adding he was open to more discussions with Rome, but the Italian government now needed to take action.
“You cannot cure high levels of debt with more debt, it is a vulnerability that needs to be addressed,” he said.
What’s an ‘Excessive Deficit Procedure’?
Although it has the power to sanction governments whose budgets don’t comply with the EU’s fiscal rules, the European Commission has stopped short of issuing fines to other member states before. The rules states that deficits should not exceed 3 percent of a country’s gross domestic product (GDP) and public debt must not exceed 60 percent of GDP — a far cry for many European countries.
Although Italy’s draft budget envisages a deficit within the 3 percent limit, increasing the deficit from a previously lower target has angered the Commission because European member states are meant to work toward adhering to the rules, not deviating from them.
Standoff between Rome and Brussels expected to continue
Italy’s Deputy Prime Minister Matteo Salvini said earlier Wednesday that the 2.4 percent deficit target was not negotiable, but other aspects of the proposal could be discussed.
Italy’s public debt pile is 131 percent of its GDP, and at 2.3 trillion euros ($2.6 trillion) is the second largest in the euro zone.
Following the announcement in Brussels, stocks listed on Italian markets held onto their morning gains while yields on 10-year Italian debt dipped to near session lows. Yield on bonds move inversely to prices.