Eight years ago, Italy’s state auditor drew widespread derision when it claimed that credit rating agencies should have taken the country’s history and beauty into account before downgrading its debt. With borrowing costs on the rise once again, a better argument is required. Instead of art, Italy should focus on the eurozone.
Rising inflation, an economic slowdown and the first European Central Bank rate rise in over a decade are all problems for a country with Italy’s level of debt. The resignation of prime minister Mario Draghi and with it the possibility of a Eurosceptic government ratchets up the fear in bond markets.
Italy recently paid the highest rate to borrow since the eurozone crisis. The spread between Italian and German 10-year bonds, regarded as the benchmark, reached a two-year high last month.
This spread is a marker of extra perceived risk. Italy’s debt pile is equal to around 150 per cent of its GDP. Remember that the EU’s debt ceiling is supposed to be 60 per cent of GDP. Italy also has the biggest proportion of debt held by residents of any large eurozone country. And although it issued longer-dated debt when rates were low, it failed to take advantage of the situation and lengthen average debt maturities to the same extent as Spain.
Still, Italian bond yields remain far below the heights they reached in the eurozone crisis. Markets are right to signal that collapse is far from imminent while the ECB is promising to intervene. It is not quite “whatever it takes” but the central bank has pledged to buy the debt of countries that come under pressure as bond yields rise — so long as it deems them to be doing what they can to keep public debt down.
Vague as it is, this support should be enough to narrow the spread. Assessing the risk of Italian debt means looking at more than the country’s own balance sheet. While the eurozone remains in place, Italy’s sovereign bond yields should cleave closer to Germany’s.
