Mixed response from analysts to Italian budget plans

Analysts' reactions to the outlines of Italy's medium-term budget plans was mixed, although by and large they appeared to be expecting Brussels and Rome to reach some sort of deal.

For those at HSBC, many details had yet to be cleared-up but it was already clear that the growth assumptions used by the government in Rome were too optimistic.

According to Italy's new budget plans, the Italian economy was set to expand by 1.5% in 2019, by 1.6% in 2020 and by 1.4% in 2021.

But HSBC believed Italian GDP would grow by a more modest 1% next year and 0.9% in 2020, with euro area GDP expanding by 1.6% and 1.4% in each of those years.

Indeed, Italy's economy had not grown more quickly than the Eurozone's since 1995, the broker explained.

Furthermore, the proposed dilution of the 2012 pensions reform would nearly halve the economic benefits from it for the economy and cost some €150bn over the next 20 years, HSBC said.

Compounding matters, Rome's proposed spending measures would do little to boost the country's potential rate of growth, it said.

In any case, the question now was whether the European Union would place Italy back under the so-called Excessive Deficit Procedure and perhaps even push for financial penalties against the country or, instead, try and negotiate a middle path with Rome, under which its stock of public debt would continue declining, even if more modestly than had been expected.

"The downward trajectory of the deficit put forward by the Italian government, while it might not be enough and subject to ambitious growth assumptions, at least provides a basis for a possible deal.

"The next few weeks will tell".

Analysts at UBS on the other hand were more optimistic, labelling Rome's assumptions for growth "relatively ambitious" but adding that, alone, they "they do not make or break debt dynamics."

Furthermore, they believed Italian bond yields and risk premiums were too big, reflecting larger deficits and a "less stable" forward debt path.

"For spreads to tighten to more reasonable levels, however, markets need to make sure that these targets are based on an appropriate quantification for the impact of adopted fiscal measures on the budget."

Rome was expected to send its draft budget proposal to the European Commission by 15 October with the EC's assessment expected by the end of November, unless it sought amendments, in which case Brussels had two weeks to send the plans back to Rome.