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Risk Appetite Continues in Pre-Asia on New Italian Budget Plan, EU Reforms

Risk Appetite Continues in Pre-Asia on New Italian Budget Plan, EU Reforms

2011-12-04 22:07:00
David Liu, Technical Strategist
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Talking Points

  • Italian government plans EUR 30 billion in austerity, further plans to raise revenue
  • Plans will include cuts to social programs, introduce new taxes
  • Monti says new measures will help Italian competitiveness, southern region
  • EU political leaders to meet December 9th, 0930GMT in Brussels

New Italian prime minister has made his first moves in tackling Italy’s burgeoning outstanding national debt, currently hovering at around 118% of GDP by introducing a series of budgetary changes, targeting major social programs and attempting to generate more revenue from other sources. Indicating that his mandate is to introduce “severe” measures to wrangle the debt, Monti announced that the state will abolish various state agencies and programs, and overhaul the current pension system. Additionally, Italian Labor Minister Forner announced government plans to eliminate pension “privileges” and reduce government costs associated with the currently less-than-transparent system. The prime minister has also said he will not receive a salary for his position.

With the introduced cuts, the government will also attempt to raise tax revenue, first by targeting the problem of tax evasion, but also with tax increases and new taxes. Plans include an intra-European financial transactions tax, targeted at business transfers between Italy and other European nations. Deputy Finance Minister Grilli introduced a plan to tax yachts, private planes and luxury cars, while average Italian consumers will be expecting a 2% increase to VAT starting from September 2012.

Markets will also be expecting more support from Germany and France as EU leaders meet later this week to discuss additional support for debt-straddled nations. Although German Chancellor Angela Merkel has repeatedly ruled out issuance of Eurobonds, expectations for further EU funding of the IMF remains high. Additionally, markets are expecting the European Central Bank to continue easing to help peripheral countries regain competitiveness and relax credit lines, as analysts see the central bank easing rates from 1.25% to 1.00% after a 0.25% cut last month.

Risk headed higher in pre-Asia low liquidity conditions, pushed by optimism that Italy may avoid asking for more support from the EU and the IMF. The continuance of easing by major central banks to target credit flows is also helping bid risk-correlated currencies higher. At the time of writing, Oceanic currencies led gainers, with the New Zealand dollar gaining more than half a percent against its US counterpart following better than previous Q3 construction data.

Weekend_12042011_Risk_Appetite_Continues_in_Pre-Asia_on_New_Italian_Budget_EU_Reforms_body_Picture_5.png, Risk Appetite Continues in Pre-Asia on New Italian Budget Plan, EU Reforms

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