The spread ignites again: what it means for Italy

With one BTP-Bund spread which closed at 200.4 points on the financial day of Friday 6 May, the nightmare of debt unsustainability returned to Italy.

We know that in the economic-financial jargon the differential between bond yields of the Italian and German state is a reference for analyzing the stability of public finances. Or, precisely, to launch an initial alarm about their fragility and lack of credibility. When the relationship skyrockets, it means that our Treasury bills are yielding more. Translated: the risk that the issuing State will not be able to repay its debt increases.

The threshold of concern was crossed with the achievement of 200 points, even if this leap is part of an international, or at least European, economic context.

An Italian case, therefore, is not on the table. However, the foreseeable rise in the ECB rates and its previous stop on extraordinary debt purchases require caution. It is not by chance that Draghi and the Minister of the Economy Franco want to avoid new budget slippages at all costs.

With the steeply rising spreadwhat is the risk nowItaly?

Spread alarm at 200 points: what does it mean for Italy?

The rising spread, or the rise in government bond yieldsmeans that the expense to pay interest to investors is set to rise, with some apprehension about future issues.

According to what is written in the Economic and Financial Document, in 2021 the cost of financing the public debt is estimated at 3.5% of GDP in terms of interest expense. The forecast is for a reduction of up to 3% in the 2025 deadline.

Logically, if the blaze of the spread will result in a more consistent and lasting increase, the higher expenditure to pay interest will impact on the deficit and, therefore, on the sustainability of the public debt.

The yield of the Italian 10-year BTP it rose to 3.134%, as it had not happened since 2018, hitting a record of 3.160% in the afternoon of May 6.

The leap was driven by a series of external factors, rather than by national events, that is, linked to the specific Italian economic situation. After the aggressive moves of rate hikes from Fed And BoEin addition to other central banks around the world, such as Brazil and Austria, the ECB is pressured to intervene as early as July with an increase in the cost of financing above zero.

L’inflation runs and is endangering the resumption ofEurozone, with the energy crisis unleashed by the war in Ukraine exacerbating the scenarios. Although recession fears remain, the normalization of monetary policy of the ECB the emergency debt purchase plan has begun and is about to end.

In this frame, theItaly stay alert. The public finances could suffer shock with the more restrictive policy from Frankfurt. Also for this, Dragons and Franco insist on the need to avoid a new deviation, in order not to unleash further tensions.

As clarified by the Public Accounts Observatory chaired by Cottarelli:

“With a 1 percentage point increase in interest rates on government bonds, persistent and uniform along the maturity curve, the interest expenditure would grow by 3 billion in the following 12 months (and by 39.4 billion in the following 5 years). In the first year, spending increases by 2 billion for the renewal of maturing bonds, and by 1 billion for new issues to cover the deficit foreseen according to current plans. “

A case Italy still not there, but it is spread remain under close observation.

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The spread ignites again: what it means for Italy


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