It's time to separate Spain and Italy.
In the heat of the European debt crisis investors often looked at these struggling nations as two sides of the same coin -- a problem for one was reason to worry about the other. That link should no longer hold.
A brief glance at the debt structure of Italy's government bond market lays bare the horrifying story. Those big debt maturities will pretty much all have to be refinanced through new issuance.
This is in sharp contrast to Spain. While the first few years look similar, don't be deceived -- some of this is pre-funded, and some won't turn up in the bond market at all, as the pickup in growth will boost the tax take available to pay down debt.
The bad news is stacking up for Italy. Italian Prime Minister Matteo Renzi may well lose his own referendum on constitutional reform in December, with the latest polls showing his opponents ahead 54 percent to 46 percent. Fitch cut the outlook on Italy's BBB+ rating to negative from stable on Friday.
This is in sharp contrast to Spain, with this weekend's breakthrough that may allow Mariano Rajoy’s Popular Party to finally be able to form a minority government, as the opposition decides it's not in their interests to resist anymore.
However, this is not the only contrast to be drawn. Spain may cut its debt issuance next year from 40 billion euros ($43.6 billion) this year to just 35 billion euros for 2017. Il Sole 24 Ore reported Sunday that the European Commission may seek clarification today on why the Italian government will fall short of its budget deficit reduction target.
Renzi is forcefully claiming he needs the extra slack to combat the migrant crisis, which has fallen heavily on Italian shores. That may be true, but it's still the wrong direction of travel for the government finances.
Italy's at least aware that it needs to extend its duration, and had surprising success in selling 5 billion euros of 50-year bonds earlier this month. Cynics would question the merits of lending such a tenor to a country of just 155 years existence. Nevertheless, the average debt cost for Italian government bonds is a paltry 0.52 percent. Graphic proof, if any needed, that the European Central Bank's negative-rate policy is keeping such zombie countries afloat.
It's been nigh on impossible to find a U.K. asset manager that will own up to buying the 50 year bond. German insurers may have stepped up -- they would likely not require marking to market, but instead can plonk the securities into a matched-liability bucket and purely focus on the juicy 2.85 percent yield for the next five decades. They need not pay much regard to the extreme length and concomitant credit risks, on the justification that it's an issue from a sovereign eurozone country and the ECB has its back.
Spain should grow 2.5 percent next year, far above Italy's 1.3 percent rate, according to European Commission forecasts. Spain's ratio of government debt to GDP should be 100 percent in 2017, against Italy's 132 percent. From a political, growth, fiscal and debt issuance perspective, Spain is more attractive and should really no longer fall in the same comparison bucket.
There is one bright spot on the horizon for Italy. Banca Monte dei Paschi di Siena may yet produce a credible rescue plan when it releases quarterly results Monday evening. Were it to succeed, that would be a most welcome sign and would justifiably raise expectations that it can tackle its other problems.
But that's a big if. And if that fails, a referendum result that rejects reform might be a catalyst for a selloff that would leave Italian debt wares available on all street corners for the next few years.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(Corrects date of Italian unification in ninth paragraph.)
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