The release of economic forecasts in preparation for the budget maneuver was enough to see the spread index re-emerge in financial markets: The index, a litmus test of the market’s confidence in the Italian economy, is returning slightly to the 200 basis point gate. It is lower than the level reached later, but still – it must be said – a long way from the 500 basis points reached during the sovereign debt crisis in 2009.
debt crisis
The crisis manifested itself in full force from the first days of July 2011, when the 10-year BTP yield reached levels close to 7 percent, and as a result, the total cost of refinancing the public debt increased. The yield difference compared to the German Bund (the so-called radiate) increased from values below 200 basis points to values above 500 basis points in a few months (570 points in November). The spread is now used as an indicator of investors’ propensity to hold Italian bonds: a higher number reflects the size of the premium a bondholder would need to own Italian rather than German bonds.
The Meloni government must find a way to finance the tax cuts it promised in the 2024 budget without putting public accounts at risk, which they say is detrimental to the budget from public debt aggravated by the financial effects of the Super Bonus. For the state, as confidence decreases, the burden on the public coffers to refinance government bonds increases and yields rise to 4.89%, the highest level in a year. If the spread hasn’t risen sharply, it’s because the yield on the German 10-year bond has risen to 2.93% after reaching a 12-year high.
The difference of more than 200 basis points becomes a political problem for both the European Central Bank and the Italian government, which is forced not to tighten financial conditions in order not to harm Italy: an increase in borrowing costs could lead to instability in Italy.
But what happened? In the economic update document that forms the basis of the budget law, the government increased the likelihood of borrowing by increasing the 2023 budget deficit target from 4.5% to 5.3% of GDP and lowered economic growth forecasts to 0.8% and 1.2% this year. dropped it to . In practice, he conveyed to European regulators that despite the contraction in economic growth, despite the commitment to reduce public debt, our country would increase its expenses by asking for new money from the market. It’s a gamble, given that economic growth combined with fiscal discipline is essential to keep debt on a sustainable path. The risk is to negatively affect the perception of solvency of government bonds. Just at a time when negotiations on the reform of the European Stability Pact were starting in full swing.
And here too – as in negotiations to reform the rules for immigrants entering Europe – a conflict with Berlin is looming. “Germany actually opposes replacing the EU’s fiscal rules (the so-called Stability and Growth Pact (SGP)) with a reform that would give governments more time to reduce public debt, but with strict commitments on reforms and investment.”
What changes for Italy with the Stability Pact reform?
German Finance Minister Christian Lindner supports a tougher line on public finances if Meloni wants to promote economic growth, not just financial stability. The conflict with frugal countries has been postponed for now until the end of the year, perhaps even after next year’s European elections.
Meanwhile, the Italian government aims to ease debt tensions with the next auction of BTP Valore, bonds designed for small savers. And so the old proposal to cut taxes for investors in Italian government bonds may come back into fashion.
Source: Today IT
Roy Brown is a renowned economist and author at The Nation View. He has a deep understanding of the global economy and its intricacies. He writes about a wide range of economic topics, including monetary policy, fiscal policy, international trade, and labor markets.
