The EU has officially rejected Italy’s draft 2019 budget - ANZ

The EU has officially rejected Italy’s draft 2019 budget, asking it to be resubmitted with a more sustainable path for fiscal settings, including a smaller structural deficit.

Key Quotes:

"Italy has three weeks to comply. Under the Stability and Growth Pact, addressing excessive debt requires a 1/20th per annum reduction in the difference between the debt-to-GDP ratio (132% of GDP) and the 60% Maastricht ceiling."

"That appears to be where the EU is focusing."

"It is also seeking clarification on the growth forecasts (averaging 1.5% y/y over the next years), which the EU believes are optimistic."

"Exceptions to the excessive debt correction procedures can be made if a government implements structural reforms that can boost growth."

"Finance Minister Tria is arguing that the EU needs to take much greater account of planned structural reforms."

"Markets will be very sensitive to how Deputy Prime Ministers Salvini and di Maio respond. Italian bond yields lifted 8-11bps across the curve."