The bracket will have lasted more than two years, in other words an eternity in the chaotic rhythm of Italian political life, but it seems that it has just been closed. Disappeared from concerns since the start of the Covid-19 pandemic, which suddenly rendered the rules of fiscal discipline in eurozone countries obsolete, the “spread” has recently returned to the “one” of the peninsula’s daily newspapers. , as an additional indication of the return to normality.
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After several days of steady increases, the difference between the Italian 10-year government bond yield and the German Bund yield – known as the “spread” in financial jargon – had risen to over 245 basis points on Tuesday, June 14th. It was enough for the European Central Bank (ECB) to announce a still ill-defined “new anti-fragmentation tool” the next day to abruptly ease the pressure. On Wednesday evening it was around 214 points.
Will this decline be permanent? It’s hard to be sure. In any case, if it testifies to the relief on the Italian markets following the reports from Frankfurt, its magnitude also reflects another phenomenon: the return of concerns about the solvency of the Italian state, at the head of Europe’s largest mountain of debt (2,759 billion euros at the end of April after according to the Bank of Italy or almost 150% of gross domestic product).
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In Italy, the diversification from the television to the coffee counter, which has repeatedly been invoked in the public debate, is a kind of barometer for the confidence of international investors in the country. Let it be at its lowest and that means markets see the country on the right track. On the other hand, when things go up, as in the summer of 2018, when Matteo Salvini’s League (far-right) and Luigi Di Maio’s 5-Star Movement (anti-system) attempted a showdown against Brussels, its fluctuations reflect concerns about Rome’s future security.
Particularly uncertain international situation
At the height of the euro crisis in autumn 2011, it was this famous spread, which rose to 575 basis points, that was the undoing of Silvio Berlusconi’s government. The latter had no choice but to resign and entrust power to a technical government led by former EU Commissioner Mario Monti to avoid a default.
On the other hand, everyone in Italy knows that the spread can be deadly. At current levels, this means that the Italian Treasury is currently 4% funded, making an explosion in debt service and hence a worsening of the fiscal position inevitable… In addition, the rise in interest rates also increases the cost credit for individuals and businesses at risk that growth will slow down.
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