Italy has become the new focus of market instability and the new concern for Spanish banks, which has aggravated its annual falls. The deficit target announced by the Italian government has not pleased Brussels or the investors. According to the Stability and Growth Pact, those countries whose debt exceeds 60% of GDP -the Italian reaches 130%– they are obliged to make a fiscal fiscal effort of 0.5% of GDP each year and "although the Italian plan does not breach the maximum deficit limit of 3% of GDP, it goes against the rules", says Nadia Gharbi and Lauriline Chatelain, economists of Pictet WM.
In the middle of the month Italy will have to announce the final budget and it will be on November 30 when the European Commission publishes its verdict. Meanwhile the crossing of statements between Rome and the European authorities will be a constant, something that has already happened this week and that for the moment has been settled with the moderation of language by the Italian Government. On Wednesday, Rome tended a bridge with Brussels and affirmed its intention to reduce the deficit to 2.1% by 2020. This gesture was applauded by the markets and although the risk premium continues at high levels, it has at least stepped down from the 300 basis points that exceeded on Monday.
"The subject of Italy will be recurrent in the coming months and investors will react to the blow of news. It will generate noise but we discard that the Italian Executive shows a radical refusal to the determined by Brussels ", affirms Nuria Álvarez, analyst of Renta 4. For David Ardura, managing director of Gesconsult, in the next months the increase of the volatility around Italy will be the prevailing rule. "An immediate solution is not expected even though Italy has toned down in the last hours. Negotiations are tough and even do not rule out that the divisions of the Executive end up leading to new elections, "he says.
Experts agree that the tensions experienced in recent weeks will not disappear overnight. In the middle of the swell, the banking sector is being the protagonist in the last sessions. In just six days the Italian banks have fallen by 11.5% for its high exposure to the sovereign debt of the country and the higher cost of the risk premium. "The maintenance of high premiums harms banks, slows credit and investment, while draining liquidity and eventually weighing down growth in the coming months," explains Antonio Zamora, of Macroyield.
The falls of the Italian entities have infected their decline in Spanish banking, even though most experts do not see a new systemic risk in Italy. The Spanish entities had close to 28,000 million euros in Italian debt at the end of the first semester. Its high weight in the Ibex weighs down the performance of the index, which fell 7.87% in the year, making even more complicated a comeback to try to close the year at least in tables.
The political noise and the probability, however minimal, of an exit from Italy from the euro fuels fears in the entities, which are very sensitive to this type of news as well as the increase in risk premia.
As if it were not enough punishment for Spanish banks, the market begins to look with concern at the intentions of the ECB. In the presentation of the outlook report for 2019, Joachim Fels, Pimco's global economic advisor, hinted at the possibility that Mario Draghi is forced to delay the first rate hike, scheduled for the second half of the year. If so, it would be a new blow for the financial sector that sees its chances of obtaining higher margins delayed. David Ardura believes, however, that before delaying the rate hike, Draghi would moderate his language.
Despite the hysteria experienced in recent sessions, Antonio Zamora, an analyst at Macroyield, is confident that Italy and the European Commission will reach an agreement. "Nobody is interested in a new conflict that threatens the integrity of the euro at the door of the elections to the European Parliament at a time of boom of the Eurosceptic formations, nor to Italy, which can not afford high sovereign bonuses for a long time without this happens invoice to the growth ", underlines.
With the 10-year Italian debt at 3.4%, March 2014 highs, and the risk premium at 285 basis points, analysts believe the country risk will remain at high levels next quarter. "It seems difficult to consolidate above 300 basis points. We must bear in mind that the 350 occurred in 2011 in a context of rupture of the euro. But to see sustained cuts below 225-250 basis points we will have to wait for an approximation of the positions to occur ", insists Zamora.
In case the market turmoil is not enough, at the end of October Italy will have to face the rating reviews by S & P and Moody's. "A downgrade of one of the two agencies could cause outflows of Italian bonds, especially from foreign investors, which in turn would increase the cost of financing Italy's high sovereign debt," says Maria Paola Toschi, global market strategist at JP Morgan AM.