Italy’s Finance Minister Says Spread Must Narrow to Avoid Effect on Banks

(Bloomberg) — Finance Minister Giovanni Tria said the level reached by Italian government bond yields following the announcement of the 2019 budget plan is not justified by fundamentals and he expects them to fall to avoid negative effects on the country’s lenders.

“We hope that, as the content and spirit of our budget are better understood, the spread will fall,” Tria told reporters in Bali on Friday on the sidelines of the G-20 Finance summit. He was commenting on the yield difference between Italian and German 10-year bonds that this week widened to a five-year high.

The Italian debt average “maturity is high so it takes a long time for volatility, for a temporary shock of the spread to fully translate into higher debt costs. Clearly the impact on banks can be more immediate and so we hope to work to reduce this spread,” he said.

With about 375 billion euros ($433 billion) in holdings of Italy’s government bonds, the nation’s lenders are reeling from the impact on their capital levels due to soaring yields.

The finance chief described next year’s budget, including a target of deficit at 2.4 percent of economic output, as “clearly expansionary but prudent,” adding that it will favor a reduction of the debt ratio to gross domestic product.

Higher Interest

On Thursday investors demanded higher interest at the Italian Treasury’s auction of 3-, 7- 15- and 20-year bonds. The sale took place after Fitch Ratings said that Italy’s budget-deficit target for next year underscores fiscal risks looming over one of the euro area’s most indebted economies.

“For now, refinancing keeps flowing, auctions are carried out regularly, clearly with higher yields, but I don’t see investors retreating,” Tria said, speaking alongside Bank of Italy Governor and European Central Bank governing council member Ignazio Visco. The minister also said that he met with the European Commissioner for Economic Affairs Pierre Moscovici and that the dialogue with Brussels on the budget is “constructive.”

Earlier this month, Moscovici told Tria in a letter that Rome’s fiscal targets are a “source of serious concern” as they “point to a significant deviation from the fiscal path” commonly agreed to by EU governments.

Visco said Italy was not discussed during the official talks in Bali and that while developments in Rome are closely followed by the International Monetary Fund and other institutions, nobody expressed concern about the fate of the euro region’s third-biggest economy.

Tria also spoke about plans for Alitalia SpA after deputy premier Luigi Di Maio said in a newspaper interview that the Treasury might enter with a stake in a new company to relaunch the airline under a plan still to be agreed upon. “The economy minister is the one speaking for the Treasury — I’ve never talked about” such a plan, he said.

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