Eurozone Crisis

Will the current Italian Budget Crisis be another repeat of the Greece Debt Crisis?

Italy debt crisis has existed for the past couple of years. Italy is the third largest economy of Eurozone, but has liabilities of approximately 2.3 trillion EUR. This is estimated at 131% of Italy's gross domestic product (GDP), which is the second highest among all Eurozone nations. (The highest is Greece, with its sovereign debt at nearly 180% of GDP.) Despite Italy's high debt, the issue was contained under the previous center-left alliance government. However, things have changed since the rise of Italy's new populist government in June 2018.

During the campaigning process in March, Italy's new coalition government, the Five Star Movement, proposed for a series of tax cuts, new social welfare policies and better pensions. Although these promises won the election for the party, the forecasted spending for these new projects requires a much higher budget. This resulted in Italy raising its 2019 budget to be 2.4% of GDP. This is three times the forecast of the previous administration, raising market concerns that it could lose control of its spending. Markets have already reacted to this risk by selling Italian government bonds, causing Italy's 10-year bond yield to reach a 3-year high.

Italy's economic growth has been relatively flat (averaging less than 0.2% annually) since 2010. Hence, with the Italian new government's proposed budget, it could tip Italy into a sovereign debt crisis and spark another potential crisis in the Eurozone. This mimics Greece's debt crisis in 2010, but the impact is expected to be much greater with Italy. This is because Italy's economy is estimated to be 10 times the size of Greece. Thus, if Italy's debt is blown out of proportion, the aftermath will supersede that of the Greek crisis and threaten to tear the Eurozone apart. For that reason, the European Council (EC) has expressed their concerns with regard to Italy's budget and urged Italy to conform to EU's fiscal rules of budget not exceeding 2.0% of GDP. However, Italy remained defiant, and stated that it will stick to its 2019 budget plans. This has caused the Italian government to go on a potential collision course with the EC. At the time of writing, the EC is due to decide its next step against Italy's budget. If it were to be rejected, this could lead to sanctions against Italy by the EC. Hence, with this incident severely weighing on market confidence, it would result in more downside risk for the EUR.

“Markets have already reacted to this risk by selling Italian government bonds, causing Italy's 10-year bond yield to reach a 3-year high.”

With more headwinds ahead for the EUR, there will be ample trading opportunities for investors and speculators. Therefore, investors who are interested to trade the EUR must be prepared for its high volatility, which is expected to last until December (refer to the table below for key Italy budget events). With EUR, the world's second largest reserve currency facing strong volatility, it could also drive market interest towards safe haven assets and currencies such as the USD and Gold.

Thus, traders who would like to take advantage of these opportunities in currencies can consider trying out Phillip Futures' MT5 platform. The platform offers zero commission on trades and the tight spreads. The very intuitive platform allows users to start small by trading micro lots, with a margin outlay of approximately US$30. Clients who are new to forex trading are welcomed to attend 1-to-1 coaching sessions with our experienced consultants, to equip themselves with product knowledge before placing their first trade. Or if you prefer to attend our FREE market outlook or introductory seminars, click here.

Key Italian Budget Crisis Events:

Date Events
29 Oct 2018 Deadline for the EC to reject Italy’s draft budget based on non-compliance with EU rules
5 Nov 2018 Eurozone finance ministers holds its regular monthly meeting
19 Nov 2018 Deadline for the Italian government to submit a revised budget to the EC
3 Dec 2018 Monthly Eurogroup meeting
10 Dec 2018 Deadline for EC to adopt a new opinion on Italy’s overall budgetary position
13 Dec 2018 ECB Monetary Policy Meeting
14 Dec 2018 Year-End EU Summit
4 Feb – 7 Feb 2019 EC publishes Economic Forecasts
 

Samuel Siew, Investment Analyst, Phillip Futures

Samuel is an investment analyst with Phillip Futures. His main area of expertise is in financials, with a particular focus on equity indices and forex. Samuel has also worked in the field of equities as a senior equity dealer in the past, and conducts regular market outlook and product training seminars in both English and Chinese.

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