An Italian budget nightmare, long feared by investors after a populist coalition government was formed earlier this year, is not a foregone conclusion, strategists at BNP Parabas wrote on Wednesday.
In fact, the investment bank expects a budget proposal that will be greeted with relief by the markets, considering the concerns that are already priced in.
The upcoming budget, to be released this month and considered for approval in October, will likely target a deficit of around 2% of GDP, the strategists said.
Under that base case, they expect: 1) a strong rally in eurozone banking sector; 2) rise in EUR to level just above USD1.20; 3) BTP-bund spread tightening of 225bp.
While the report does not see a big risk from the upcoming proposal in the short term, even in a worst-case scenario, other concerns remain. In the medium term, macro and political developments are likely to present further risks.