Markets relieved as Italy moves closer to long-awaited budget deal with EU

Source: Xinhua| 2018-12-14 02:52:20|Editor: Mu Xuequan
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ROME, Dec. 13 (Xinhua) -- Financial markets let out a sigh of relief Thursday, the day after Italy took its biggest step so far toward resolving a seven-week-old standoff with the European Commission over the country's 2019 budget deficit.

The compromise plan announced late Wednesday by Italian Prime Minister Giuseppe Conte would involve a deficit equal to 2.04 percent of the country's gross domestic product(GDP) next year. That figure is much higher than the 0.8-percent-of-GDP deficit the commission called for earlier this year, but it is below the 2.4 percent Italy proposed in October, which had been repeatedly rejected by commissioners.

The Italian government has argued it needs the higher spending levels to make good on key electoral promises aimed at jumpstarting the country's slow-growing economy.

The main indexes on the Italian Stock Exchange gained ground in the wake of the latest news, and the euro currency strengthened against the dollar and other major currencies.

Most importantly, the yield on the Italian government's benchmark ten-year bonds fell below the 3-percent barrier for the first time since the standoff began, ending the trading day at 2.94 percent, 6 basis points lower than that of Wednesday.

Thursday's close represented the fourth time in six trading sessions Italian government bond yields fell on secondary markets, the tail end of a gradual improvement from the 12-month high of 3.82 percent reached two months ago.

"Over the last several sessions, each piece of news hinting at a resolution to the standoff help markets improve," Massimo Baldini, a public finance professor at the University of Modena and Reggio Emilia, told Xinhua.

Baldini said the economic fundamentals for Italy hadn't changed in recent weeks, but that movement toward an end to a potential clash with the executive branch of the European Union helped calm investor nerves.

The budget plan Conte proposed Wednesday after a closed-door summit with European Commission President Jean-Claude Juncker still lacks formal approval from the commission as well as from Conte's domestic political allies, many of whom vowed not to compromise with European authorities.

Still, the developments represented a key step forward, according to Francesco Caruso, a financial analyst with Market Risk Management.

"The high yields and threat of a major disagreement with the commission were not problems yet, but if they had continued they would have become something to worry about," Caruso said in an interview.

Caruso said that in addition to the prospect of a budget deal, the market reaction Thursday was tied at least in part to a relatively strong day on stock markets across Europe.

Meanwhile, Fabrizio Brasili, an independent financial analyst, said some typical end-of-the-year factors may have played a role.

"Around this time of year there are always asset managers trying to rebalance their financial holdings," Brasili told Xinhua.

The clock is still ticking toward hard deadlines for the budget process to be completed once and for all. The formal evaluation period for the commission concluded earlier this week, though that has been pushed into overtime by recent developments. The Italian parliament will soon begin debate on the measure, which must gain its stamp of approval no later than Dec. 23.

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