From “quota one hundred”, the minimum difference in yield between Italian and German bonds, to the “Athens syndrome”, with Italian bonds yielding as much as Greek ones (and even a little more, over a two-year duration). In between, the interruption of the season of negative rates and the tsumani of the political crisis. Incomprehensible to many foreigners, who do not understand how it is possible to do without such a statesman Mario Draghi. Thus, as a decade ago, the “Italy risk” rises again, while the usual fragilities rise to the fore, starting with public debt. The first thermometer is the cost of the CDS (Credit default swap), the “policy” that to insure against country risk: the “premium” a year ago was 75, now it is 170; it is not yet stormy – in the darkest moments, in 2012, it reached 565 – but the weather is already bad. Suffice it to say that these days, insuring with credit default swaps on risk-Germany costs 17, on the US 23. It must mean something. However, it is still too early to conclude that the red alert has been triggered: all in all, the yields of ten-year BTPs are rising but without dizziness, compared to the recent past. The concern of the markets is that this is a phase of volatility that is not in the least over. And whose results remain “open”.
Multiple equilibria
Economists call them “multiple equilibria”, phases in which the pendulum can rapidly move towards the negative or towards the positive pole. And it doesn’t take much to change direction. “For a debt to suddenly become unsustainable, expectations are enough, there is no need for anything to happen,” he explains Rony Hamaui, long-time economist and lecturer at the Catholic University of Milan. This is a bit like the very subtle distinction that separates a moment of difficulty from the abyss. Now there is an additional tool to deal with any difficult phases: the anti-spread shield announced last Thursday by the ECB. Even with its “conditionalities” and, above all, a risk of unspoken, perhaps deliberate, to keep your hands free. “We could not expect the total network that was laid out at the time of the pandemic, we will not be able to sleep completely peacefully – continues Hamaui – the basic message is: this tool can only be used in the face of fiscal behavior that respects the public finance rules of the Europe. At least from a formal point of view, the stakes have been set, then it will be a question of verifying how binding they are. However, the objective remains to push Italy to put its accounts in order and at the same time to leave the markets the role of “biting”, letting the spread run a little if necessary, compared to the requests of some political forces to create further deficits “.
The third largest debt in the world, ours (2.756 billion in May), can only arouse apprehension. For those who see the glass as half full, there are at least a couple of considerations that help: the first is the composition of government bonds; the second is inflation. The composition of our public debt, with a percentage of fixed-rate bonds of just over 77%, helps to explain why changes in interest rates are slowly passed on to debt servicing; in practice, on the coupons paid to subscribers. At the beginning of the 1990s the ratio was reversed: floating rate securities were over 60% of the entire public debt, inflation-linked securities did not exist (now they are 11.52% of the total, roughly what floating rate securities).
Spending increase in 2022
At the same time, the weighted average life of the debt has gone from just under four years to the current 7.09 (also thanks to the fact that the Bot people have disappeared, due to lack of returns); below the record of 2010 but still around the highest values of the decade. For this reason, rate movements take a long time to translate into an overall change in interest spending on all debt. However, the Mef estimates speak of a possible increase in spending for 2022 around 5 billion (on the 65.97 billion estimated in the Def). “During the crisis of 2010-2011 it was the distrust of the markets that put the peripheral countries on the ropes, today there are much more deteriorated fundamentals for Italy, in terms of public debt – he explains Guido Tabarelli, lecturer in economics at Bocconi University – what worries most is not so much the possible explosion in interest spending, but the potential slowdown in growth. And in this context, the political framework is fundamental to eliminate the uncertainty that blocks investments. However, we must not forget that the Italian public debt has a rather long average duration, which helps to amortize interest rate hikes: if anything, what is surprising is why in recent years the Treasury has not exploited low rates more to extend it even further. , I do not explain “.
On the new issues, on the other hand, the rates of the moment dominate, not surprisingly compared to the historic low of 0.1% yield recorded in 2021, in the first half of this year it has already been reached 0.9%. Of all the 125 billion of medium / long-term bonds that the Treasury plans to issue from 1 July to the end of December, the rate increases will obviously be felt, even if there should not be particular tensions in placements, given that the new issues from here at the end of the year, net of maturing securities, they were limited to approximately five billion. The other factor that helps the major debtor state is inflation, because it reduces the “real” burden of debt and, in the case of public finance, improves the famous debt / GDP ratio, because the latter is “inflated” by the race of prices. As long as growth continues.
Furthermore, everything is relative: if interest spending were to explode it would still be a problem. After a series of variables (growth, inflation and so on), Credit Suisse analysts have set a “sustainability” threshold for interest spending at 3%. “There is no doubt, now Italy is worrying, without this crisis we could also have seen the spread narrow – comments Anna Guglielmetti, Head of Fixed Income at Credit Suisse Asset Management – after all, compared to the worst times, he had already begun to do so. However, all in all, the worsening of the indicators took place in an “orderly” manner, but we are certainly once again in a situation of uncertainty and volatility that is destined to last for a while. According to our analyzes, the average cost of borrowing of the Italian government, equal to 2.4% in 2021, will reach 2.9% in 2022, slightly below 3% which is the level we have estimated as necessary to keep stable. the debt / GDP ratio. “In absolute terms, the average cost of the stock of debt is not very high, although it had already risen slightly in 2021: compared to 2012, when it was 4.25%, we are well below. despite everything, the debt was not 150% of GDP, which is not the same thing.