I appreciate that the will and desire at a European sovereign level to keep the Eurozone intact is not to be be underestimated. Certainly my calls for Greece to leave the Euro proved to be wide of the mark.
However, I always thought that the basis of underpinning a low yield on sovereign debt now that we live n a world of default and repayment rescheduling was to run a fiscal policy that was appropriate with the economic times and the financial condition of the nations finances.
In Italy we see the latest call to be sounded is that of overturning all thoughts of austerity. there is talk of tax cuts and spending restrictions, but the moist likely outcome is that Italy will actually start to spend more . It will do because the inconclusive general election held on February 24th and 25th has led to an another appointed Prime Minister, Enrico Letta, in charge of a fragile coalition. Within that structure, if one digs deep enough one will find a plotting and scheming Silvio Berlusconi.
So what is it I have missed?
At the close last week the spread of the 2 and 10 year Italian government bonds over their German equivalents was +151bps (2 year) and +289bps (10 year). This afternoon the spread has fallen to +140bps and +276bps.
Is it because Fabrizio Saccomanni is now to be the Minister of Economy and Finance. He is another appointee ..not elected and for all the talk that he is buddy buddy with Mario Draghi and will not agree to policy decisions he cannot accept with, the real test will come when the depth of the difficulty that Italy faces has to be grappled with.When the professional politicians start jockeying ahead of the next election that surely will come sooner as against later, how will a lifetime bureaucrat stand up to the pressure?
I am sorry but I do see how we can square this circle. Saccomanni has to convince the markets and the ECB that Italy is going to be fiscally responsible.
The new appointed Italian leadership seek to roll back much of Monti’s austerity. They want to cut taxes but say they will cut spending…but they will fail to deliver and debt and spending will rise as all fiscal restraint is shoved out of the way as popular policies in a “live today, pay tomorrow” approach to economics takes root.
With spreads down to record levels Italy has the scent of a screaming sell.