Debt crisis, because with the rate hike Italy is the “weak link” in the euro area – Corriere.it

Italy risks being the Eurozone country most exposed to a debt crisis with the ECB continuing to raise interest rates and tightening on the quantitative easing or the purchase of government bonds, one of the tools that the European Central Bank uses to support economic growth in the euro area. To say it is a survey by the Financial Times: 9 of the 10 economists questioned believe that our country is the one “most at risk of an uncorrelated sell-off in its government bond markets”. The financial newspaper recalls that the Meloni government “is trying to follow a path of fiscal rectitude”, with the deficit expected to fall from 5.6% of GDP in 2022 to 4.5% in 2023 and 3% the following year.

The “Italy risk”

Despite this, Italy’s public debt remains one of the highest in Europe, at just over 145% of gross domestic product, and last week the yield on the 10-year bond exceeded 4.6%, almost quadruple the level of a year ago and 2.1 percentage points above the equivalent yield on German bonds. Marco Valli, an economist at UniCredit, told the British newspaper that “increased debt refinancing needs” and Italy’s “potentially complicated” political situation make the country more vulnerable to a sell-off on the bond markets. There had already been warnings about Italy risk on 15 December, after the announcement by the ECB of a further 50 basis point rate hike, when the markets perceived Italian debt as more risky than that of Greece throughout the yield curve, making the BTP jump above the 4% threshold. In light of this situation, some government officials, including the defense minister, had criticized the move by the ECB.

Towards a new rate hike

The ECB expects to proceed with increases of half a percentage point in the first months of 2023. «The Governing Council believes that interest rates will still have to increase significantly and at a steady pace to reach levels restrictive enough to ensure a timely return of inflation to the medium-term objective of 2%», explained the Frankfurt board in December. Klaas Knot, governor of the Dutch central bank and one of the hawks on the governing council, told the Financial Times that the “second half” of the cycle of rate hikes has just begun. Many analysts believe that the ECB is overestimating the risks associated with inflation and underestimating the prospect of a recession: in December, four fifths of the 37 economists interviewed by the FT had predicted that the ECB would stop raising rates in the first six months of 2023 and two-thirds believed it would start cutting them next year in response to weakening growth.