20181024-法国巴黎银行-BNP_PARIBAS_CALL__Italy_–_The_good,_the_bad_and_the_ugly_25页_1mb

Summary of BNP PARIBAS CALL: Italy – The good, the bad and the ugly

Core Content

This report from BNP Paribas provides an analysis of Italy's fiscal and economic situation in 2018 and its implications for the markets. It outlines the risks associated with Italy's budget, the impact of external and internal factors on growth, and the political implications of the budget decision. Additionally, it includes insights on the Italian credit market and FX strategies.

Main Points

Fiscal Policy and Debt Outlook

• Italy's 2019 Deficit Target: The government's fiscal targets for 2019 raise concerns about the credibility of Finance Minister Giovanni Tria as a fiscal prude.
• Fiscal Projections: The official fiscal targets for 2018-2021 include headline fiscal deficits of 1.8%, 2.4%, 2.1%, and 1.8% of GDP respectively. The primary balance is expected to improve from 1.8% in 2018 to 2.1% in 2021.
• Debt-to-GDP Ratio: Under more cautious assumptions, the debt-to-GDP ratio is expected to remain flat in 2019-2021. This is a concern as a persistently high ratio reduces fiscal space for future shocks.
• EU Response: The EU Commission is likely to initiate an Excessive Deficit Procedure (EDP) on Italy following its negative opinion on the budget.

Growth Risks

• Economic Slowdown: Italy's economy grew at an average of 0.2% in H1 2018, with high-frequency indicators suggesting further downside risks in Q3.
• Household Savings: The household savings rate has increased this year, reflecting higher domestic uncertainty and a shift from previous years of consumption-driven growth.
• External Drag: Italy's economy is more sensitive to exchange rate fluctuations than other EU countries. Structural domestic weaknesses further compound this risk.
• Fiscal Impact on Growth: The expansionary budget is expected to have only a temporary growth effect and fails to address long-term structural issues.

Credit Market Outlook

• BTP Futures Steepener: The BTP credit curve is expected to steepen as the credit risk premium moves from shorter to longer maturities. A futures steepener strategy is suggested, with entry at 158bp, target at 220bp, and stop at 120bp.
• Credit Risk Premium: The credit risk premium for Italy is currently at levels seen in 2012, with spreads discounting non-IG ratings.
• Foreign Investor Exposure: Foreign investors have significantly reduced their exposure to Italian debt, which could be a sign of market caution.
• EU Funds Underweight: EU funds are also underweight in Italian credit, indicating a lack of confidence in the country's fiscal strategy.

FX Strategy

• EUR Short Exposure: The report suggests that tactical EUR short exposure remains attractive, given the current market sentiment.
• EURJPY Short Exposure: The EURJPY pair is noted as offering an attractive risk-reward ratio, with a suggested entry at 131.30 and target at 126.50.
• Market Sentiment: FX markets are not pricing in significant Italian risk premium, which could be an opportunity for traders.

Key Information

• Political Context: The budget decision is part of the government's strategy ahead of the EU parliamentary elections in May 2019. Political tensions within the coalition could resurface.
• Opinion Polls: Recent polls show the League leading with support around 30-31%, while Five Star and PD have seen modest gains and losses respectively.
• Credit Market Dynamics: The BTP credit curve is expected to steepen, with a focus on long-dated futures underperforming short-dated ones.
• Legal Disclaimer: This document is non-independent research and is intended for professional clients and eligible counterparties. It does not constitute investment research and may be subject to conflicts of interest.

Conclusion

Italy's fiscal policy and economic outlook present a mix of challenges and opportunities. While the budget may provide some short-term relief, the long-term risks to growth and debt sustainability remain significant. The credit market is in a deleveraging phase, and FX strategies such as short EUR and EURJPY may offer attractive opportunities. Political dynamics and market sentiment will play a crucial role in shaping the future of Italy's economy and financial markets.