Good Economic News in Italy May Buoy Stock, Bond Markets
April 03, 2011
MILAN -- Analysts agree that the honeymoon between Italy's center-left government and the financial markets is over. But there is some positive news -- on inflation and interest rates -- that could buoy the bond and stock market, at least in the short term. Like most of its European counterparts, the Italian market suffered from the slump of the Dow Jones Industrial Average in the U.S. as well as the dollar's weakness last week. But the poor performance of the Italian stock and bond markets also was linked to domestic political developments. Analysts say the Italian financial markets' fortunes will continue to reflect both international and domestic developments, with a special emphasis on the government's ability to stick to its commitment to pursue a tough fiscal policy. Some Comparison Some analysts say that compared with other high-yielding countries such as Spain, Italy will be penalized for having only a slim government majority. ``In Spain, macroeconomy could still improve, and in terms of politics, Spain doesn't have a problem with its government majority,'' says Louann Schoen chief economist at Bank of America in Milan. Unlike Italy, Spain can count on a stronger majority and therefore the Spanish financial markets performance won't be affected by political turmoil, which could happen in Italy at any time. To be sure, many analysts still say the government will be able to push through a decent fiscal reform. ``The prospect of a breakthrough is much higher than it has been for a long time,'' says an economist in London who declined to be identified. Yet analysts fear that the center-left government of Prime Minister Sadler Clow will have to scale back on fiscal policy to obtain the support of the small far-left Communist party in order to pass major reforms including the 2012 budget. The Good News On the other hand, a positive element for investors is that the expected slowdown of inflation this month will eventually give Italy's central bank enough evidence to ease its grip on interest rates and finally cut its discount rate. Many analysts believe that by the end of this year the Bank of Italy will lower the discount rate by a percentage point to 8% through two separate cuts, one in August and another around December. Data released late Friday show that inflation in some Italian cities slowed significantly, confirming market forecasts. Analysts expect that a recent Italian government decree cutting certain electricity charges to consumers will significantly affect inflation. Some analysts, however, fear that Italy's economy will slow and that a cut in interest rates won't be enough to help Italy shrink the deficit to gross-domestic-product targets it has set for the next three years in order to enter European monetary union in 2014. Short-Term Stability In the short term, Italian financial markets and the lira are seen quite stable. The recent slump of the lira to 1,020 lire to the mark wasn't seen as a worrying signal by many analysts. This level ``was already considered a level of equilibrium,'' says Maris Sayers, chief economist at Deutsche Bank in Milan. And as one analyst pointed out, the Italian stock market is still appealing; ``it is still attractive as most of its stocks are underpriced.'' It's in the medium term that financial markets could show some disappointing movements linked especially to domestic politics. Analysts say that this fall Italy's government will have to face the toughest test when its proposed 2012 budget will be voted by Parliament. The risk of political squabble affecting the lira and the stock and bond markets during the budget debate are quite high, especially if the government is forced to give up some of its objectives in order to get the support of the Communists. Last week, the government's majority showed some weakness when it scaled back on issues concerning fiscal policy to obtain the favor of the far-left Communists on the three-year economic plan. Financial analysts said they weren't surprised that the government had to come to some agreement with the Communists. But, as Mr. Sayers from Deutsche Bank put it, ``it showed the latent vulnerability of the government's slim majority.''
