Italian budget issue still can shake euro

Posted 20 November, 2018

Lately, the European Central Bank stated that the regional bond market faces minimal impact from the Italian issue. Meanwhile, the gap between the yield of 10Y bonds of Italy and Germany expanded to 335 basis points. The European currency is sensitive about this fact. According to the daily statistics, the euro-to-US dollar rate plunged from the top of 1.1470 to the bottom line of 1.1403 after numerous attempts to break the $1.15 handle. As a result, the 1.14 handle is under a threat now.

At present, the greenback chews over the hint of the US Federal Reserve, while the euro is less vulnerable to the budget problem of Italy. However, it remains unsettled, and Rome can even face sanctions from the EU. According to the available data, the possible penalty for defiance can amount to EUR 3.4 million. For reference, the Italian government stands firm with the budget deficit set at 2.4%.

As for the long-term perspective, the EU can raise pressure on Italy, one of the leading economies in the euro-area, which definitely will play against the European currency. In particular, the gap can get wider. This situation is yet to be a reason for a panic. The gap is coming closer to 400 basis points and the European assets will be under increasing pressure from investors.

Moreover, the regional political risks do not promote the interest rate increase by the European Central Bank next year. Seeing the Italian issue, the players are no longer confident that the central bank may raise the rate until end-Q4 2019. However, this is just a guess, since the markets usually focus on expectations, and it still can get under the euro skin.

Previous forecast

21 November, 2018 16:21

← Italy closer to EU budget penalty

Italy has got one step closer to the fines from the European Commission citing sharp noncompliance of the Italian draft budget to the EU requirements. Brussels confirmed that Italy strongly violated the Stability and Growth Pact. As a result, Italy can face a fine of 0.2% of GDP for that. Along with budget noncompliance, the European Commission prepared a separate report about Italian state debt, which was rescheduled on fears of debt burden in the country. As a result, it was discovered that Rome failed to comply with EU lending rules as well. It is expected that Italy will face slower GDP at 1.1% in 2018 (1.6% in 2017), while in 2019 the rate will be 1.2%. At the same time, the EC believes that the budget deficit will hike to 2.9% and 3.1% in 2019 and 2020 respectively.

Italy closer to EU budget penalty

Next forecast

20 November, 2018 15:57

Prices for oil may slide to $60 →

Brent oil managed to somewhat recover to $67/bbl, though the rebound was short lived. A mid-term outlook remains pessimistic despite local demand for the oil. As a result, prices have inevitably decreased to the support level of $60/bbl. Risk instruments are said to face a risk of even bigger losses until the situation gets clear. The last hope is the upcoming meeting of OPEC members slated for early December, the market expert noted. In the case of fruitful meeting and the countries agree on production cutbacks, oil can receive some support. Still, this scenario is barely possible. 

Prices for oil may slide to $60
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