Italian budget: rational or radical ?

After a turbulent summer, September looks every bit as tense for the Italian government, which has to present its 2019 budget objectives on 27 th September. As reflected in the volatility of BTP-Bund spreads in the past few weeks, the markets remain very sensitive to the numerous and different political statements. Because of their divergences and the constant balance of power between the main government figures, it is still very difficult to predict the deficit target that will be announced for next year. We currently expect three scenarios (while keeping in mind that their associated probabilities may change markedly over the next two weeks): Scenario 1: Between 2% and 2.5% with a probability of 50%. Scenario 2: Between 2.5% and 3% with a probability of 45%. Scenario 3: More than 3% with a probability of 5%. Whatever the outcome considered, it is likely to lead to a downgrade of Italy’s sovereign rating to BBB- by end-October. As scenario 1 is the most favourable , it would enable Italy to obtain a stable outlook and a contraction ( albeit limited) in risk premia . In contrast, if scenarios 2 or 3 were to materialise, the prospect of significant budget ary slippages may have a far greater negative impact on Italian securities. Italian banks would also be negatively affected by downgrades of their ratings and a tightening of their funding conditions at the worst possible . time.