At each election on the other side of the Alps, the same concern resurfaces. That of seeing a government reluctant to apply European rules or quick to let deficits slip away take power. That of a scenario where the country’s imposing public debt, which today exceeds 150% of gross domestic product (GDP), is targeted by speculators and drags the euro zone into a debt crisis comparable to that from 2010-2012.
Even today, the possibility of seeing a government led by a coalition between the Fratelli d’Italia party (extreme right) of Giorgia Meloni, the League (anti-immigration) of Matteo Salvini and Forza Italia (liberal right) of Silvio Berlusconi worries European markets and observers. The difference between ten-year German rates, considered safe, and those of Italy – this is the spread, considered by investors as the barometer of risk – fluctuated, on September 22, around 230 basis points , against 130 points at the start of the year.
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It had soared to nearly 300 basis points in the summer of 2018, when the League and Luigi Di Maio’s 5-Star Movement (antisystem) entered into a showdown with Brussels over public finances. In autumn 2011, at the heart of the eurozone debt crisis, the gap peaked at 575 points. Faced with the uncertainties linked to the rise in rates by the European Central Bank (ECB) and the possibility of seeing a right-extreme right coalition rule the country after the general elections of September 25, certain hedge funds have once again been unleashed against Rome.
According to data from analyst firm S&P Global Market Intelligence, the total value of Italian bonds borrowed by investors to bet on falling bond prices in August reached its highest level since January 2008, at over of 39 billion euros. Does this mean that the country and the euro zone are on the threshold of a new debt crisis? “The situation is worrying, but we are not there,” said Gilles Moëc, chief economist of the Axa group.
The Italian banking system is much healthier than it was fifteen years ago and the level of the debt burden has fallen to 3.5% of GDP this year, compared to almost 6% in 2007. Above all : the euro zone has since equipped itself with a series of firewalls intended to prevent such a crisis from happening again. Latest: the ECB’s anti-fragmentation tool (the transmission protection instrument, IPT), thanks to which the central bank can buy the debts of a country whose borrowing costs soar unjustified – and thus cut short any speculative outbreak.
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