It’s not terribly surprising that the market is aghast at the utter lack of regard for decorum Italy’s populist leaders demonstrated on Thursday when they announced their budget deficit target.
What is a bit surprising though, is just how hard Italian assets were hit on Friday considering this really wasn’t difficult to see coming.
The decision by League leader Matteo Salvini and Five Star chief Luigi Di Maio to thumb their noses at Brussels and ignore Finance Minister Giovanni Tria’s pleas for fiscal restraint was entirely predictable.
As we noted on Thursday, the appeal of populism lies in the promise of short-term fixes for complex problems and in Italy (as in the U.S.) delivering on that promise entails reckless fiscal policy.” In other words, what else was Di Maio going to do? Was it realistic to expect Salvini would suddenly, out of the blue, decide to respect Brussels’ wishes? Did anyone really think Tria had a handle on this situation?
The answer is “Of course not” to all of three of those questions.
At best, you could argue that if Di Maio and Salvini were going to take a stand on this, they should have made that clear weeks ago as opposed to digging in their heels at the last minute. But even there, both men have for months played a kind of good cop-bad cop game with themselves, where one day they’re committed to respecting budget rules and the next day they’re railing against the tyranny of nefarious eurocrats.
Consider this from from former trader turned Bloomberg columnist Richard Breslow, out Friday morning:
I understand that surprises happen. And hindsight isn’t fair to club someone over the head with. But sometimes it is. Just yesterday demand at the 10-year BTP auction was the highest since last May. Unfortunately for those awarded an allocation, yields today are a whole lot higher. To say the least. That was putting an inexplicable amount of faith that the finance minister had his two deputy premiers well under control. On very little evidence. Other than a wishful assumption that the even hard-line populists always bow to market-friendly necessities. We really have lost our way.
