Italy Gets Down to Budget Business

(Bloomberg) -- Italy's political leaders begin discussing the 2019 budget in earnest on Tuesday with investors monitoring for signs of just how far they'll push the European Union's budget rules.

Senior officials from the League, the junior partner in the ruling coalition, are due to meet with their leader, Deputy Prime Minister Matteo Salvini, for an initial assessment of the policies they will include and their impact on the public finances, one of the officials said, asking not to be named discussing a private meeting.

While the League won just half as many votes as the anti-establishment Five Star Movement in March's election, Salvini has made most of the running since their coalition was agreed in June and has held a narrow lead in most recent polls. A spokeswoman for Five Star was unable to say when her party leadership will meet to discuss its own plans.

Salvini signaled in recent days Italy's budget deficit could touch the EU's 3 percent limit next year as the coalition tries to ignite the economy. The previous government had agreed to a much tighter spending program to bring down the country's mountain of public borrowing, a risk cited by Fitch Ratings when it cut the country's outlook to negative last week.

Salvini has now decided to push for a deficit of up to 2 percent of gross domestic product, La Stampa newspaper reported Tuesday. Italian Finance Minister Giovanni Tria may be targeting a deficit around 1.5 percent, La Stampa said last week, possibly narrowing the differences among the government leaders.

Italian 10-year bonds rose, with the yield falling 7 basis points to 3.09 percent. The spread with similarly dated German bonds narrowed 9 basis points to 273 basis points.

“In the autumn the new government will make its mark, with a new path -- change, growth,” Salvini said in an interview with German broadcaster Deutsche Welle released Monday. “We are already working on growth, which should finally rebound.”

Market Risk

The spread between Italian 10-year bonds and similarly dated German bunds has traded near its widest in five years in recent sessions on concern about the government's fiscal plans. Italian bonds rose on Monday after conciliatory language from Salvini, who said he'll respect “all rules” while lowering taxation.

Finance Minister Tria, an economics professor with no political base of his own, is trying to rein in the ambitions of Salvini and Five Star leader Luigi Di Maio who've promised voters tax cuts and new benefit spending. The coalition's plans would require about 75 billion euros ($87 billion) in extra spending in the first full year, according to calculations by Carlo Cottarelli, a former International Monetary Fund executive, cited on Monday by Corriere della Sera.

“Our government is free and independent from the multinationals, from big finance, from banking powers -- both international and European -- we have no fears,” Salvini told Deutsche Welle, dismissing investors' concerns. “The economic reforms will provide all the answers that the so-called markets and the ‘lords of the spread' are waiting for.”

--With assistance from Kevin Costelloe and Tony Czuczka.

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Ben Sills, Alessandra Migliaccio

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