Investors previously dumped Italian bonds over the summer over concerns the new governing coalition’s fiscal plans would further strain the country’s already huge budget deficit. Specifically, government ministers pledged to enact a minimum income for the poor, cut down a previous pension reform and diminish taxes in the forthcoming 2019 budget, which fueled concern over the government’s ability to pay for these programs.

“Italian assets have taken a hit this year. The selloff was sparked by fears that Italy’s populist government would breach the EU’s key budget deficit limit of 3% of gross domestic product (GDP), as the two major parties in the new governing coalition had vowed to cut taxes and boost welfare spending in their campaign,” said BlackRock. “Italian assets have recouped some losses recently, only after Rome repeatedly assured it would respect EU rules in its soon-to-be released budget. We see scope for a further recovery in Italian asset prices, but do not see them returning to pre-election levels anytime soon.”

Italy, the Eurozone’s third-largest economy, is 7.25% of EZU’s weight.

For more information on the European markets, visit our Europe category.

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