Since the end of August, the Italian spread has been continuously increasing: on Thursday it rose above 200 basis points, a threshold it had not reached since last year’s political elections, and this increase is starting to create some concerns at a political and economic level. The spread is the difference between the interest rates on German government bonds (generally low because the German economy is considered the most reliable in Europe) and those on Italian government bonds: it is an indicator of how much the Italian economy is perceived as risky by the so-called “financial markets”, i.e. the set of operators who invest in securities, whether company shares or government bonds. In short, by those who lend money to the Italian state.
The higher the spread, the riskier the Italian economy is considered. The increase in the spread seen in recent weeks is a consequence on the one hand of some international trends and on the other of reckless choices by Giorgia Meloni’s government.
It is true – as the government often repeats – that it partly depends on the global economy slowing down, inflation still being high and central banks raising interest rates to bring it down. But the Italian spread is increasing more than that of other countries, and this depends on the fact that the government has decided to borrow more money than expected in the coming years, thus worsening the state budget, which is already burdened by one of the largest debts public in the world. This is causing the markets to worry, as they trust the Italian economy less and ask for higher interest to buy Italian government bonds: in this way, the spread rises.
To understand how the spread works, and why its increase is a problem for Italy, we need to start from government bonds.
Government bonds are the means by which a state borrows money. Italy needs to constantly borrow money to finance its spending: it sells government bonds at a certain amount, promising to repay them by a certain date to whoever bought them. The repayment date is the “maturity” of the government bonds. These securities are bought by funds, banks, large and small savers. Obviously, Italy promises to those who buy its government bonds (and therefore to those who lend it money) to repay them with interest. Interest rates on government bonds, therefore, represent how much investors ask to be rewarded for lending money to Italy.
As always happens, the safest investments – those that put the money you invest at least risk – allow you to earn less; while the investments that allow you to earn more, thanks to higher interests, are those that also involve the greatest risks of not seeing the money invested return. In other words, if you are a state and you want to convince someone to lend you their money, you will have to offer a return (i.e. the profit obtained with interest) that is considered convenient by investors: if according to those who invest there is a risk that you doesn’t return that money, then to convince them you will have to offer higher interest.
Therefore the “spread” – an English word which in Italian can be translated as “width” – defines the difference in yield between the government bonds of Germany, which is the country considered to be the most solid and reliable and which serves as a term of comparison, and government bonds of another country, in this case Italy. The higher the spread, the more risky that country will be perceived compared to Germany, which is usually attributed a risk close to zero.
– Read also: Let’s review: so what was the spread?
The rise in the spread is a topic that tends to immediately alert the media, politics and public opinion due to everything it has represented in the past: the sovereign debt financial crisis of 2011 and the political and economic instability of that period . Today things are very different compared to then, when the spread was at 500 points and the very existence of the euro was at risk: there is no ongoing financial crisis and the Italian economy is not in recession. However, the rise in the spread is a signal that something is actually wrong and that there is something that worries international investors.
Part of this increase, as we said at the beginning, depends on factors outside the government’s control. The most decisive one was the increase in interest rates decided by the European Central Bank to bring down inflation: they are the reference interest rates for the entire economy, which therefore raise all rates, from those on mortgages to those on the government bonds of all the Eurozone countries.
But the Italian spread has increased more than the spread of other countries, a sign that there is a part of the increase that depends precisely on Italian specificities. And this has been attributed above all with the way in which the government intends to set up the budget law and in general with how it intends to manage public finances.
From the statements of politicians and the reconstructions of the newspapers in recent weeks, it has emerged that the next budget law (i.e. the law that indicates how the state will spend its money next year) will be very complicated, for a banal reason: there are no lots of money available. And this for a series of reasons: the first is linked to the enormous cost of the measures that the government would like to introduce, the second to the Superbonus which has significantly worsened the state’s accounts, and the third to a general prospect of a slowdown in the economy.
– Read also: There isn’t much money for the next budget law
The government had made it clear that it would somehow find the resources to finance the measures it had promised, by cutting some spending or introducing some tax (such as that on banks’ “extra profits”). Instead it decided to borrow more money than expected and declared this in the Update Note to the Def (NADEF), one of the most important economic documents which is published every September by the government and which indicates its forecasts on the performance of public finances. : essentially how much it expects the economy to grow, how much money it expects to borrow and how the government debt will fare.
In particular, he declared that both this year and next year he will have a higher deficit, meaning that more spending than expected will be financed by debt and not by state revenue. In the NADEF a deficit was programmed at 4.3 percent of GDP in 2024, while in the previous forecasts it was supposed to be 3.6, while that for 2023 rose to 5.3 percent from 4.7. The public debt, however, will remain substantially unchanged, while it has been constantly decreasing for some years.
These numbers gave rise to three types of concerns. The first concerns Italian economic stability: Italian public debt is one of the highest in the world and since the pandemic there has been an effort to reduce it. The Meloni government has indicated in the NADEF that it will not start reducing it until 2026 (and even then there are many doubts).
The second level of concern is that this decision must be approved by the European Commission, and it is by no means a given: from next year the new European rules on public finances should come into force, aimed precisely at containing public debt. It is plausible to hypothesize that tension will be created between the government and the Commission.
The third concerns the plausibility of the government’s forecasts, which according to many were rather optimistic about the performance of the economy and about some of the ways in which it will find resources: for example, it seems to expect to collect around 20 billion from privatisations, a very high figure and ambitious to achieve. It is plausible that things will not go exactly as expected and that the debt will therefore be even worse.
With these concerns, investors have therefore increased the interest rates they demand on Italian debt, making it clear that they believe the Italian economy has become riskier after recent government decisions.
2023-09-29 16:32:48
#worrying #spread #post
