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IT PHOTO

Italy to cut deficit from 2020, provides relief to markets

Italy will cut its budget deficit targets from 2020 and reduce its debt over the next three years, Prime Minister Giuseppe Conte said on Wednesday, easing fears about fiscal policy in the euro zone’s third-biggest economy.

The ruling coalition last week stunned investors by tripling Italy’s previous deficit target for the 2019-21 period to pay for tax cuts, welfare for the poor and a planned revision of an unpopular pension reform.

Speaking to reporters after a meeting of ministers, Conte said the government would push ahead with its expansionist fiscal programme but would keep its spending in check.

“We will show courage above all in 2019, because we believe that our country needs a budget that calls for strong growth,” said Conte, flanked by deputy prime ministers Luigi Di Maio and Matteo Salvini, and Economy Minister Giovanni Tria.

Conte confirmed a deficit target of 2.4 percent of gross domestic product (GDP) in 2019 and said this would fall to 2.1 percent in 2020 and 1.8 percent in 2021.

He predicted the debt/GDP ratio would fall beneath 130 percent next year and hit 126.5 percent by 2021. It is currently around 131 percent, the second highest in Europe after Greece.

The government did not release growth targets, but Tria said the gap between Italian growth and the rest of the eurozone would halve next year. The IMF has forecast growth of 1.0 percent in Italy in 2019 against 1.9 percent for the eurozone.

News the coalition planned to cut the deficit faster than previously indicated caused Italian government bond yields to fall sharply on Wednesday, while the Milan bourse outperformed other major stock exchanges in Europe to close up 0.9 percent.

Investments

The coalition came to power in June promising to slash taxes and boost welfare spending, and says an expansionary budget is needed to lift Italy’s underperforming economy, which is some six percent smaller than it was a decade ago before the sovereign debt-crisis exploded.

Tria said the 2019 budget would include a lift in public investment and would offer tax breaks to firms investing in equipment and staff. The jobless rate would fall from around 10 percent now to as low as 7 percent, the prime minister said.

European Commission officials and EU allies had expressed their concern over Rome’s spending plans and there was some relief over the reduced targets.

“It’s a good signal that the trajectory has been revised because it shows the Italian authorities are hearing the concerns and remarks from their partners and the European Commission,” EU Commissioner Pierre Moscovici said in Paris.

Italy’s minister for European affairs, Paolo Savona, went to Strasbourg on Wednesday to try to reassure EU lawmakers that Rome was not being irresponsible.

“I think there is no chance that Italy will default on its public debt,” said Savona, who has previously called into question Italy’s membership of the euro currency.

“I do not intend to take any action against the euro. On the contrary, I want to strengthen it,” he said on Wednesday.

FR PHOTO

Characterization of bonds (obligations) and capital markets

On 23 November 2017, the French Cour de Cassation (second civil room of the French Supreme Court dedicated to private cases) ruled, by a literal and traditional construction of Article L. 213-5 of the French monetary and financial Code, that the characterization of bond (obligation) is not conditioned on the guarantee of repayment at par. Bonds that are not capital guaranteed remain nevertheless bonds.

In the previous instance, on 21 June 2016, the French Court of appeal of Paris ruled, on the contrary, that repayment at par was included as an essential feature in the concept of bond (obligation). This position was held to protect consumers, in a context where they have subscribed for life insurance based on non-capital guaranteed products, and they have not get back, at least, what they have invested.

It has to be mentioned that insurance companies are sometimes sellers in the secondary market of bonds (obligations i.e. titres financiers), that the market calls structured products. This implies that the performance of the bond is linked to an underlying which can be volatile and sometimes the capital invested is not guaranteed. In a way, non-capital guaranteed structured obligations can economically be similar to derivatives (contrats financiers) and this may result in massive losses. In such circumstances, the insurance company has to ensure, when such bonds / structured products are sold to consumers repackaged as life insurance, that the advisory and the information obligations are fully complied with.

When we are in presence of bonds that are not capital guaranteed, the characterization of bond is then not only crucial for insurance companies but also for issuers, subscribers, and holders for other regulatory purposes.

The current position of the French Cour de Cassation will reassure the bond market as a whole.

Up to date 23 November 2017