Italy not yet rocked the equity boat

The implications of new Italian Government for the longevity of the euro are being debated more and more in the financial press. Tuesday’s Telegraph has a very good article written by former foreign secretary William Hague on the potential risks. Comparisons to Greece being in the same position a few years ago and finally backing down are possibly misguided. The new Italian Government believe all the countries current financial woes come from the membership of the Euro. They wish to cut taxes, increase spending on investment to encourage the economy to grow. All very sensible policies, to grow the economy, but as Mr Hague pointed out Italy’s membership of the euro prevents them from issuing more lira.  This means they will have to rely on outside investors to fund the policies, that may prove slightly trickier, hence the recent rise in borrowing costs in Italy.

So far, the impact on the broader European economy has been muted. The euro has lost ground against the US dollar but not by a materially different amount to the US basket of other currencies. Yields on ten-year German bunds have fallen in the past month. Where you might expect to see some contagion is with Spain, ten-year yields have risen slightly. So far, the markets seem little concerned with what is going on in Italy. Probably taking the view that the new government's bark will be worse than its bite. One other subtle difference between Greece and Italy, Greeks, by and large, wanted to stay in the euro, Italy as a nation is apparently more eurosceptic.

One analogy that could be used between Greece and Italy, the old joke if you owe the bank 10000 pounds it is your problem when you owe them a much larger sum it theirs. It is not beyond the realms of possibility that at some stage equity and bond markets take this story a bit more seriously. There will be a time when someone blinks and markets may sit up and take more notice of events in Italy.

Mark Carney appeared to play a game of I told you so as he blamed Brexit when appearing on Tuesday in front of the Treasury Committee, for the slowdown in the economy. Also claiming each household was 900 pounds worse due to Brexit as inflation picked up and investment weakened.

Posted on May 23, 2018 .