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Italians Obsessed by ‘Lo Spread’ as Yield Makes Headlines

Italy's Prime Minister-Designate
Mario Monti, Italy's new prime minister-designate. Photographer: Alessia Pierdomenico/Bloomberg

As Italy struggles to survive the European debt crisis, watching “lo spread” is becoming a national obsession.

The yield difference between Italian 10-year government bonds and German bunds surged to a record 5.5 percentage points on Nov. 9 after the nation’s borrowing cost breached the 7 percent threshold that prompted Greece, Portugal and Ireland to seek bailouts. A day later, Prime Minister Silvio Berlusconi agreed to step down when an emergency budget package was passed.

Italian lawmakers approved the austerity measures Nov. 12, clearing the way for Mario Monti, a former European Union competition chief, to try and form Italy’s next government.

“I think it’s very scary and we are all concerned,” Gianluca Brozzetti, chief executive officer of luxury-goods maker Cavalli Group, said in a Milan interview. “It’s a challenge for our politicians to act fast and to find solutions to give Italy the place it deserves in the world, which is not this.”

“Spread a 500” (spread at 500 basis points) was a front-page headline of Corriere della Sera, Italy’s top-selling daily newspaper, on Nov. 9. That evening’s television talk shows featured charts of the 10-year spread as Italian economists and politicians discussed Italy’s crisis.

Spread Watching

In downtown Milan, adjacent to the city’s landmark Il Duomo cathedral, a group of Italians gather frequently to gaze at market prices on a giant TV screen displaying Bloomberg data.

“What’s the spread? It’s the difference that a country pays on interest rates compared with another,” said a 76-year-old retiree who would only identify himself as Peppino. “How can we pay 6 percent interest rates in Italy and Germany 2 percent?” Peppino said. “It shows that Italy is sick. When a country is strong, the spread falls.”

Italy’s 10-year yield is currently 6.41 percent, down from as high as 7.5 percent last week. Its yield premium to bunds, which has averaged 63 basis points in the past 10 years, has narrowed to about 458 basis points.

Alessandro Villa, a salesman for a confectionary company outside Milan, says he started following the 10-year spread in July. “It’s probably going to take six months to emerge from the crisis, hopefully we can do it,” he said.

Not everyone in Italy is familiar with English financial markets jargon. Le Iene (The Hyenas), a popular weekly satirical television show on one of Berlusconi’s networks, recently grabbed Italian legislators coming out of parliament in Rome to quiz them on English market terms such as spread, ratings, fundamentals and rating companies.

Marcello Di Caterina, a member of Berlusconi’s People of Liberty Party, struggled when asked by a reporter to define “lo spread.”

“Ah, it’s something regarding the economy,” he said. “But I’m not a member either of the Budget Committee or the Finance Committee.”

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