Italy deficit shakes markets in Europe

London : Plans by Italy’s new populist government to loosen the budgetary belt a few notches roiled markets in Europe, while Tesla shares took a beating after CEO Elon Musk was charged with fraud. With the spending plans putting the Italian government on a collission course with the European Commission, Milan took the brunt of the blow in equity markets, dropping by more than 4.6 per cent at one point. Thursday’s budget deal that calls for a 2.4pc deficit for the next three years came after warnings from the EU to rein in spending, and vastly exceeds the 0.8pc deficit foreseen by the previous, centre-left government.

“The Italian budget continued to cast a shadow over the markets on Friday, setting up a rocky end to a rocky month,” noted Connor Campbell, financial analyst at Spreadex trading group. The trading of shares in some Italian banks was briefly suspended amid heavy price falls, with Banco BPM tumbling by of almost 11pc at one point. In afternoon trading, it and other major Italian banks UniCredit, Intesa Sanpaolo and BPER Banca were down over 8pc.

Shares prices of major European banks outside Italy also slumped, with French lender Credit Agricole down 4.7pc, Deutsche Bank sliding 4.0pc and Barclays losing 2.8pc. Meanwhile, the yield on Italian government bonds jumped and the euro also dropped heavily against the dollar. Italian government bonds “have unsurprisingly been under pressure following the government plan to aim at a 2.4pc deficit/GDP in 2019,” said analysts at UniCredit in a note to clients. The spending plan “...creates several important challenges, from a confrontation with the EC to the possibility of a downgrade of the sovereign credit rating,” they said, adding that volatility in Italian bond prices was likely continue, especially as the European Central Bank winds down expanding its purchases of government bonds.