Key takeaways from Philipp Lienhardt:
Even though Italy’s populist government has agreed on a budget deficit, our stand on Italian government bonds remains unchanged and we maintain our hold rating. We see two main reasons for this:
- The budget deficit has been fixed at 2.4 per cent, which is higher than the 1.6 per cent originally proposed by the finance minister. We expect this budget to be rejected by the European Commission and sent back to Italy for review. This doesn’t mean that it can’t pass – the Italian parliament still has time until the end of the year. But it makes an agreement more complicated.
- We expect the rating agencies Moody’s and S&P to downgrade Italy’s credit rating from BBB to BBB-, which will certainly cause some volatility in the next few weeks. There is a good chance that the credit spread for 10-year government bond yields between Italy and Germany will rise above 300 basis points.
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