Earlier this week the Italian government stuck to its guns when it announced that it was not willing to open negotiations over its deficit target of 2.4% of gross domestic product next year, although they did indicate that there would be some aspects of the budget that could be up for discussion. The announcement came after the European Commission formally rejected Italy’s 2019 budget proposals, believing that the borrow-and-spend plans could be a spark for another debt crisis that the EU seems ill-prepared for.
In a defiant statement, Matteo Salvini, Italy’s Prime Minister, stated ‘We are always open to dialogue, we can talk about investments, but not about the 2.4% deficit or the reform of the Fornero pension law’. Public pensions were one of the main battlegrounds in the election campaign earlier this year. The two anti-establishment parties pledged to ‘erase’ the Fornero reforms of 2011. That law raised the retirement age upwards every two years, to reach 67 years in 2019. The measure was forecast to save the public purse EUR80bln over 10 years. Current, pension expenditure is approximately 16% of Italy’s GDP, compared to Germany’s 10% (the UK’s is just over 6%) and an OECD average of 8.2%. As it stands at the moment the average retirement age is 62, much lower than the EU average.
Whilst the budget did include some money-saving measures, there was very much an emphasis on spending, with the government’s coalition partners believing the measures will stimulate growth and ultimately reduce Italy’s massive, and unsustainable, debt-to-GDP ratio, standing at (an optimistic?) 130%.
And it’s not only the EU that is taking a dim view of Italy’s current financial position. Yesterday Italy offered its first inflation-linked bonds to retail investors since the bond rout earlier this year, when Italian bond yields touched 3.7%. A BTP Italia issue has collected just over EUR860mn of orders over the last 3 days, the lowest since they were first introduced in 2012. This comes after Italy did manage to get away EUR5.5bn worth of 3, 7 and 20 year of government funding on Tuesday, but only just. The 2038 issue cover was a lowly 1.4 times, down from 1.9 last month. It would not be so bad if there was not another EUR250bn of debt on the slate for next year… 40% of which will be offered in the 10 years or longer space!