Bond markets cheer as Italy and EU thrash out budget deal

European negotiators reached a deal which is “not ideal” with Giuseppe Conte’s Italian government after months of wrangling over the country’s budget.

The agreement, announced this morning, includes concessions from both parties as Italy’s deficit is set at 2.04 per cent of gross domestic product next year.

The populist government, which includes deputy prime minister Matteo Salvini’s Northern League, faced pushback from the EU over plans to increase the deficit to 2.4 per cent, up from 1.8 per cent in 2018.

The European Commission had threatened Conte it would discipline his government over its excessive deficit, saying it broke the EU’s fiscal rules.

“Let’s face it: the solution on the table is not ideal. But it allows us to avoid an excessive deficit procedure at this stage, provided that the agreed measures are fully implemented,” Commission vice president for the euro Valdis Dombrovskis said on Twitter.

Italian bonds were cheered by the news as the two-year bond yield hit its lowest level in seven months, sliding 14 basis points to 0.39 per cent.

The five-year bond dropped to 1.8 per cent, while the 10-year bond stood at 2.8 per cent, down 14 points.

Meanwhile the gap between the Italian and German 10-year bonds contracted to 252 points from 268 late on Tuesday.

Meanwhile, the Borsa Italiana was up 1.62 per cent.

“Italy urgently needs to restore confidence in its economy to ease financial conditions and support investment. Ultimately, this is what will support purchasing power of all Italians,” Dombrovskis said.

Deputy prime minister Matteo Salvini said yesterday he is “greatly satisfied” by the outcome of the budget talks, claiming it would help millions of Italians next year.