LONDON: Italian stocks and government bonds sold off on Thursday after a Bank of Italy official said the country's deficit would rise to 3.4 percent of GDP in 2020 -- thereby breaching European Union regulations -- without an increase in VAT sales tax.
Italy's borrowing costs were up 5-8 basis points across the curve on the bank official's remarks, which also predicted a deficit of 3.3 percent of gross domestic product for 2021 unless the sales tax is raised or other fiscal measures taken.
The benchmark 10-year bond yield rose 7 bps to a one-week high of 2.63 percent. The spread of Italian 10-year bonds over top rated Germany widened to as much as 258 basis points.
Italy's stock index fell after the comments and was down 0.3 percent mid-morning.
The news has renewed concerns that Italy will breach EU rules on its budget deficit.
"They would be breaching the 3 percent threshold over three years and they wouldn't comply with Europe as a result," Natixis strategist Cyril Regnat said.
"They will have to hike the VAT if they want to stabilise the finances. This is very negative for BTPs (Italian government bonds)."
Italian bond yields remain far below the highs of 2018 however when Italy's coalition government was at loggerheads with the European Union over its projected budget deficit for 2019. The 10-year yield still remains some 110 basis points lower than the 3.711 percent hit in November last year.
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