The Italian powder keg

Alarm bells are ringing in Europe after Italy’s economy minister Giovanni Tria lost the battle trying to keep the country’s budget deficit in check.

Instead the government of the Eurozone’s third largest economy approved spending and borrowing targets that will see its next year’s budget at 2.4% of GDP, directly violating EU requirements of keeping it at, or below, 2%. Italy’s public debt now stands at more than 130% of its GDP, the second largest ratio after Greece, making EU bankers increasingly nervous about a potential repeat of the Greek financial crisis. Italian banking stocks are being sold heavily this morning, declining on average between 5% and 6% against the overall decline of the FTSE MIB index by 2.1%. Other European indices are also on the slide although the FTSE is holding up the best among its peers, down only 0.12%. The bond markets are seeing some rocky trade with Italian bonds losing value and yields on 10-year Italian paper rising by 20 basis points. The euro has also not been immune and has weakened against both the dollar and the pound.

Ryanair shares rise despite walkout

The protracted battle between Ryanair and its European pilots and aircrew over wages and work conditions seems to be yielding no results. Months of on and off strikes, primarily affecting routes to Germany and other countries in Northern Europe, continues with a walkout of German pilots who are joining striking Dutch and Belgian pilots and cabin crews in all three countries and in Italy, Spain and Portugal. A total of 250 flights across Europe have been cancelled so far but this is not the largest strikes at the airline or the most disruptive compared with the 400 flights cancelled in peak travel season at the beginning of August.

Somewhat counter intuitively Ryanair shares are up 0.38% this morning as some traders are taking a bet that Ryanair will not have to concede to the pilots and crews despite the months of wrangling. The strikes are having more effect in Germany and parts of Europe than in the UK and Ireland, two of Ryanair’s key markets, but the reputational damage of the repeated cancellations cannot be discounted. Its peer and competitor EasyJet is already seeing a pickup in demand on some of Ryanair’s routes. EasyJet’s shares are on the rise this morning, up 0.57% as the company reported annual profits at the upper end of expectations.

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