< Back to Trader Blog Articles

Italy`s noise resurfaces

Peppapig

Italy’s debt burden was a very noteworthy concern (and still is) for the euro zone, this time last year. The reason being that Italy is one of the largest economies in the euro zone, and were the country to default on its debt, the ECB could not simply step in to the rescue. Potentially, this could be a trigger for a deep recession.

Up until recently, this threat has not been spoken about as often. However, concerns on this issue appear to be breaking the surface.

Italy versus Europe

The European Union has threatened sanctions against Italy due to its public debt being currently twice the EU limit, and still rising.

More specifically, the current populist government in Italy is highly aware that a default by the country would mark one of the biggest in history. Hence, the government is arguing that the ECB would not allow matters to get to this point – and eventually offer concessions to Italy if it meant dodging a default.

If this little game intensifies between the ECB and Italy, then the change in investor sentiment alone could be enough to do substantial damage. By just considering the premium that investors are demanding to hold on to Italian 10-year debt in comparison to the German 10-year debt, one can see a rise of 2.20 percentage points between the two. This already is an indication that investor sentiment has changed about Italy.

If this little game intensifies between the ECB and Italy, then the change in investor sentiment alone could be enough to do substantial damage. By just considering the premium that investors are demanding to hold on to Italian 10-year debt in comparison to the German 10-year debt, one can see a rise of 2.20 percentage points between the two. This already is an indication that investor sentiment has changed about Italy.

The Euro

Furthermore, the euro itself has not had the easiest time lately. Roughly, since 2018, the currency has been on a straight downward track against the U.S Dollar.

That being said, Italy is a country that has historically relied on currency devaluations to keep itself competitive – the case when the Italian lira was in circulation. Technically speaking, Italy has always relied heavily on debt to grow its economy, and what is being seen is not a particularly new incidence.

However, in spite of the weakness of the euro, Italy has no longer had the luxury of devaluing currency in order to stimulate growth. In fact, when one considers the growth in government debt versus GDP, it is easy to see that this has continued to accelerate massively after 2006.

At this point, Italy could argue that it would be to the country’s advantage to leave the euro and reintroduce its own currency as a way to pay its debts and reintroduced as a domestic currency. In fact, this speculation is already being heard by Deputy Prime Minister, Salvini.

Forward Looking

At the moment, what matters most is not whether Italy would do the unthinkable and leave the euro – rather, whether investors consider this as a significant likelihood.

Either way, the matter of Italian debt has resurfaced to the vanguard and economic growth could moderate from here should global risk appetite decline significantly as a result of Italy. If this is the case, then it is possible for markets to see further demand for risk-off assets.

The Calamatta Cuschieri Traders Blog is available daily on CC WebTrader. Other market coverage including coverage of the International Bond Markets is also available.

Important(Notices)
The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Similarly any views or opinions expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the particular circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Calamatta Cuschieri & Co. Ltd. (CC) has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. CC does not accept liability for losses suffered by persons as a result of information, views or opinions appearing on this website.
This website is owned and operated by Calamatta Cuschieri & Co. Ltd (Co. Reg. No. C13729) of 5th Floor, Valletta Buildings, South Street, Valletta VLT 1103, Malta. CC is licensed to conduct Investment Services in Malta by the Malta Financial Services Authority.