With the risk of Italy’s borrowing costs rising amid Greece’s standoff with creditors, Prime Minister Matteo Renzi’s budget targets may be out of reach.
Italian 10-year bond yields are about 57 basis points higher than the yearly average the government set in its April budget plan. Late on Thursday, Greece submitted a proposal for a bailout of 53.5 billion euros ($59.4 billion) to creditor institutions to stay in the euro. Should the bid fail, Italy’s debt-servicing may increase further, threatening its goals.
“There’s a risk that the political fallout at euro zone and national levels turns out to be particularly destructive,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. “Markets would naturally focus on Italy as being the most vulnerable.”
Italian borrowing costs more than doubled at an auction on Friday. The Rome-based Treasury sold 6.5 billion euros of 366-day bills at 0.124 percent, up from 0.061 percent at the previous auction of similar-maturity debt June 10.
Italy has the largest debt mountain in Europe as a proportion of its economy after Greece. Renzi, 40, spoke this week of how the events in Athens were detracting from the bigger issues in Europe such as how to get economies to grow.
Standard & Poor’s said last week that Italy risks paying the biggest cost in the euro region with the yield on the 10-year bonds possibly rising to above 3.5 percent by the fourth quarter from 2.17 percent on Friday.
The rating company put the bill for Italy in terms of higher financing costs at about 11 billion euros. Italy’s debt agency chief, Maria Cannata, called the estimate “aggressive,” adding that she did not understand how it was calculated.
The April budget plan calls for putting Italy’s debt on a descending path starting from 2016 after peaking at 132.5 percent of gross domestic product this year.
A Greek default “would crystallize a significant portion of Italy’s additional debt due to its contributions to the state aid funds, making the total debt less sustainable if the recovery does not accelerate,” said Gianluca Ziglio, a fixed-income strategist at Sunrise Brokers LLP in London.
The plan also assumes the budget deficit at 2.6 percent of GDP this year, below the maximum 3 percent allowed under euro-region rules. To meet the April goals, Renzi needs to shore up the nation’s fragile exit from a record-long recession.
Italy’s economy grew 0.3 percent in the first quarter from the previous three months, ending a recession that lasted more than three years in Europe’s third-largest economy. The April plan calls for GDP to rise 0.7 percent this year.
“I am not very concerned about a technical solution for Greece, which I think can be found,” Renzi told reporters in Brussels, where he attended emergency Greek talks. “I am more worried about the outlook for Europe at a time we need more growth, more future, more innovation.”
Faced with the risk of a Greek exit from the euro, moves in bond markets so far have been tempered. A drop in Italian bonds on Monday was only the deepest since May, reflecting faith that the European Central Bank’s bond-buying plan and euro-area firewalls would hold down yields.
The Treasury and central bank in Rome have sought to dismiss fears that developments in Greece might weigh on the nation’s public finances. Italy’s bilateral loans and contributions to the European aid fund totals 35.9 billion euros, the Treasury said last month.
“The direct effects of the Greek crisis, for the path of the commercial and financial links, should be modest for Italy and for the region even in the worst scenarios,” Bank of Italy Governor Ignazio Visco said on Wednesday.
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