Daily Management Review

Bank of Italy Governor: Italy is a footstep away from losing investors confidence


Italy may lose investor confidence if the country's government does not adhere to fiscal discipline, said Ignazio Visco, President of the Italian Central Bank. The warning sounded against the backdrop of record growth in yields on Italian government bonds, caused by investors’ fears about the future status of the country in the euro area and the state of its debt, which is already one of the largest in the world.

The head of the Central Bank of Italy, Ignazio Visco, said on Tuesday that the country is "only a few steps away from the loss of investor confidence", referring to destabilization of the financial market caused by political uncertainty. He warned that the weakening of fiscal discipline leveled the value of multi-year reforms, but noted that the current sale of Italian securities is based "solely on emotions." In the meantime, the drop in demand from investors has already led to a record increase in the required yield on Italian public debt. The rates growth was the fastest for two-year papers; in less than a week there was more than tenfold growth (to 2.7%, the maximum since September 2012). For ten-year bonds, yield also rose to a maximum in four years - 3.2% (only a week ago it was only 2.4%, in early May - less than 2%). The sale of assets also touched shares of banks-large investors in government securities.

Recall that as a result of the March parliamentary elections, none of the Italian parties could get a majority of votes sufficient to form a government. As a result, this process has been drawn out to a great length: representatives of the two main parties - the Northern League and the Five Star Movement - failed to agree on the candidacies of the ministers with the country's President Sergio Mattarella. In particular, he refused a euro-skeptic candidate for the post of Minister of Economy. Now the formation of the technical Cabinet of Ministers is entrusted to the economist Carlo Cottarelli. To do this, he will also need support of both houses of parliament.

Market participants fear that the main issue in the new elections, which may take place in the fall, will be preservation of the country's membership in the euro area. Earlier, the market was agitated by a radical program prepared by the parties. The paper assumes an increase in borrowing to finance budgetary expenses, as well as abolition of a pension reform carried out in 2011. In such circumstances, the international rating agency Moody `s announced its decision to place Baa2 's rating on the review with the possibility of a decrease, Standard & Poor's and Fitch are still maintaining comparable ratings - BBB with a stable outlook. Recall that Italy is already the third country in the world by size of a state debt (after the USA and Japan). It amounts to € 2,3 trln (more than 130% of gross national product). At the same time, according to the IMF, the debt burden is also high in the private sector - 173.5% of GDP (including corporate debts - 118% of GDP, households - 55.5% of GDP). The growth of yields on Italian debts means a rise in the cost of servicing them when issuing new bonds. In this case, placement of securities for more than € 250 billion to cover the deficit is planned only in 2018.

"The anxiety of investors due to the situation in Italy leads to an increase in yields on bonds of other peripheral countries and weakens the euro. Demand for safe assets, on the contrary, increased sharply; as a result, the spread between Italian and German securities increased to 250 basis points, which is the maximum since the euro crisis, "- Capital Economics states. The center believes that the elections can be held in September or October, but if the parties do not initiate a separate referendum on the membership of the country in the euro area, then a full-fledged crisis will be unlikely. Nevertheless, the problems around the Italian national debt may put pressure on the ECB, which is planning to complete the quantitative easing program in September. 

source: capitaleconomics.com