Italian budget proposal under scrutiny
• The key points of the budget law. The Italian Government negatively surprised the markets by announcing a substantially increased budget deficit target for 2019-2021 to 2.4% in a move that could undermine the potential to reduce the Italian debt burden (130% of GDP) in the coming years.
• Market reactions: The Italian move has triggered a selloff on Italian assets (bonds, equities and banking sector in particular). Uncertainty will remain high with debt sustainability under scrutiny by markets and rating agencies expected to reassess the country rating by end of October. A downgrade is now more likely.
• Our view: On Italian debt we have a neutral view and will continue to monitor the details of the budget law and developments in the economic outlook. We stay cautious on Italian equity where we focus on less leveraged companies. Short-term volatility could impact European equity, but we are more constructive on mid-term outlook.
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