Italy's Budget Excuses Get Short Shrift From Euro Finance Chiefs

Oct 01 2018, 1:24 PMOct 01 2018, 2:55 PMOctober 01 2018, 1:24 PMOctober 01 2018, 2:55 PM

(Bloomberg) -- Finance Minister Giovanni Tria sought to reassure his euro-area colleagues about Italy’s budget targets as he faced criticism on arrival at a meeting in Luxembourg.

After unveiling plans for a substantial increase in the budget deficit last week, Tria was greeted with little enthusiasm from his counterparts. France’s Bruno Le Maire said that the European Union’s budget restrictions must be respected by everyone while European Commissioner for Economic and Financial Affairs Pierre Moscovici said that Italy’s budget amounts to a “very, very significant” deviation from its previous projections and almost certainly violated the rules.

Tria will cut short his attendance at the Eurogroup to return to Rome Monday night to finalize the government’s budget outline for 2019, his spokesperson said. So far, it’s only released the deficit target.

"I will try to explain what is happening and how the budget plan was formulated,” Tria said on his way into the meeting. Fellow ministers can stay “calm” about Italy’s budget as the government is committed to reducing its debt burden in 2019, he added.

Italian bonds fell for a second day with the yield on 10-year notes rising 6 basis points to 3.21 percent at 3:48 p.m. in Rome. The spread over German bunds reached 273 basis points.

Budget Brinkmanship

Tria is fighting a rearguard action inside Italy’s coalition government with deputy prime ministers Luigi Di Maio and Matteo Salvini, the administration’s two political heavyweights, demanding more resources to deliver on their election promises. Tria had tried to limit the deficit target to 2 percent of GDP during last-ditch negotiations on Thursday before ultimately agreeing to 2.4 percent.

The government "will never sacrifice workers on the altar of the spread and of the crazy rules which have been imposed on us," Di Maio told reporters on the sidelines of a conference in Rome. "This government doesn’t butcher people, the music has changed."

All the same, the spending plans are likely to face a push-back from the euro-area, following the traumatic experience of the debt crisis that pushed the currency bloc to the brink of collapse. Italy has the highest nominal debt in the continent, meaning that doubts about its ability to refinance its obligations could pose an existential threat to the euro-area.

“I just want to be very clear, that there are rules. And rules are the same for every state,” Le Maire told reporters. “Our futures are linked. All the futures of the euro zone are linked.”

Arriving at the same meeting, EU’s Moscovici echoed remarks by the Brussel-based Commission Vice President Valdis Dombrovskis that the Italian authorities’ announced targets appear to be not "compatible” with the EU requirements.

"It’s not in the interest of anybody to have a crisis in Italy, with Italy, on the markets or between Italy and the European Commission ," Moscovici said. "Let’s keep our nerves."

Dutch Finance Minister Wopke Hoekstra echoed the general concern.

“The signals we’ve been getting so far aren’t very reassuring, at the same time many of the details are still unclear,” he said. Although Italy isn’t part of the Eurogroup’s agenda “you can rest assured that this will be a topic on everyone’s mind,” he added.