Italy At Risk Of Seeing 'Repeat Of Greek History' -- Former ECB Director
(Kitco News) - Although market fearsof an Italian contagion effect are now largely subdued, one strategist saidthat the country is not out of the woods, yet.
With Premier Giuseppe Conteheading a newly sworn-in Cabinet to head a coalition government, financialmarkets found relief in political stability, but not everyone is confident in thepopulist leaders’ policies.
Francesco Papadia,fellow of the Bruegel Institute and former market operations director of theEuropean Central Bank, told Kitco News that he remains sceptical whether thenew government’s goals can be fiscally sustainable.
“For the time being,things have calmed down, but I would not say that we are out of the woods asyet, because we want to see whether this new government will comply with itselectoral promises, which of course, cannot be implemented without big problemson the fiscal side,” he said.
At the helm of thisgoverning coalition is a right-wing party with a staunch anti-immigration bentand an apparent Eurosceptic agenda, with Paolo Savano, Italy’s new Europeminister having described the euro as a “German Cage.”
The new coalitiongovernment is set to face mandatory confidence votes this week where theItalian Senate will vote on the new cabinet, followed by a similar vote fromthe Parliament’s other chamber.
Last Tuesday saw thebiggest single-day surge on record for Italian 10-year bond yields on the backof news that PresidentSergio Mattarella rejected the candidate for finance minister, a move seen bymany as a stand against populism.
North American markets tumbled in response, with the S&P 500 down more than 1.2% on the day while safe-haven assets rallied; spot gold climbed $6 an ounce by market close. Markets have since recovered as volatilitysubsided as a new government promised renewed stability in Italy’s politicalsystem.
Papadia said that shouldItaly’s debt burden spiral out of hand, the ECB will not be in a position tocome to assistance.
“Let me be very clear onthis, the ECB cannot do anything for Italy in particular, so I don’t think thatthe ECB could come in and solve Italian problems,” Papadia said. “Italianproblems are not economic problems currently.”
As of 2017, Italy’s ratioof government debt to gross domestic product stood at 131.8%, compared toGreece’s 172% during the height of the European debt crisis in 2010.
Papadia added thatindicators show a relatively healthy macroeconomic landscape.
“It’s not great, but it’sdoing OK. Growth is back, unemployment is coming down, non-performing loans arecoming down, [there is] a nice primary surplus on the fiscal side,” he said.“The problems are created by the intended policy of the new government, and theECB cannot do anything about that.”
Papadia said that Italy’spolitical tensions may be exacerbated by policy that contradicts economicviability.
“When the governmentrealizes that it cannot do what it wants to do, there would be some tension inthe bond markets, but not much more than that. If they were to continue, thenyou could see a repeat of the Greek history,” he said.
By David LinFor Kitco News
Follow @davidlinMTL
dlin@kitco.comwww.kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.