Should we fear the worst for Italian debt?

Italia - Oct 24 2018

Since they came to power, Matteo Salvini and Luigi di Maio have been making staggering statements in budget matters, revealing their desire to get away from the European budget set of rules. Since then, government bond yields have risen steadily. Should we be worried and fear the worst for Italy and therefore for the Eurozone?

10-year benchmark interest rate in the Eurozone

The crucial question is that of the sustainability of the Italian public debt. By 2020, the situation of the third economy in the Eurozone is less dramatic than it seems. By stabilising the interest rate at the end of September 2018, the public debt could be more or less sustainable. It will decline in 2019, from 131.2% to 130.3% of GDP. According to the assumptions of the Observatoire Français des Conjonctures Économiques (OFCE), only a very strong and lasting rise in bond interest rates above 5.6 points would lead to an increase in the public debt ratio. In other words, the bond rate should exceed the level reached in the paroxysm of the 2011 sovereign debt crisis. Should such a situation occur, it would be hard to believe that the ECB would not intervene to reassure the markets and avoid a contagion to the Eurozone.

 

Julien Moussavi, Head of Economic Research - Sources: Beyond Ratings, Datastream

 

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