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Editor's note: this Trade View was co-authored with Saxo Bank technical analyst Kim Cramer Larsson.]
Since the populist Five Star/Lega coalition took power in Italy, the country’s standing within the European Union has grown less clear. What
is clear, however, is that the new government is looking to implement expensive domestic policies which will increase the deficit of an already over-leveraged country. Italy’s debt-to-GDP ratio stands at 131%, second only to Greece in Europe; Brussels wants it to contain the deficit and while Italy’s minister of Economy and Finances Giovanni Tria is trying to do so by looking not to exceed 1.5% in deficit, his stance is finding opposition from other politicians which argue that it is necessary to go over the 3% deficit limit imposed by the EU in order to implement new policies and to invest in infrastructure.
Concerns are also arising regarding Rome’s intentions to remain in the EU. This comes on the back of reports that Italian politicians have been seeking support in the form of sovereign debt from countries outside the EU, most notably the US and Russia.
This might be a signal that Italy is preparing for a referendum.
We believe that political risk will remain high, especially during the months of September and October when Italy is due to present the 2019 budget. Another, related risk is that Moody’s could potentially downgrade its rating by one notch, making its sovereign debt rating just one notch above junk.
