30 May 2018
Bob Cunneen, Senior Economist and Portfolio Specialist
Italy’s bond and budget gap to Germany
Sources: Sources: NAB Asset Management Services Limited, IMF Fiscal Monitor, Thomson Reuters.
Italy is again in the headlights. After the European debt crisis of 2011-12, Italy managed to enter a brief period of stability. However in Italian history, stability is only temporary.
Italy’s budget deficit had gradually improved to -2 % of nominal GDP in 2017. Yet this was still well above their more conservative German partners who are running a 1% budget surplus. Indeed this 3% budget balance gap between Italy and Germany (inverted red line) had been stable over recent years.
The European Central Bank’s (ECB) “whatever it takes” bond purchases and low interest rates helped push Italian government bond yields down over recent years. Italian bond investors now seem to have been lulled into a sense of complacency by the ECB policy actions over the past five years and wishfully ignored Italy’s potential risks.
After Italy’s confusing general election in March 2018, a strange coalition involving the conservative Northern League and the populist Five Star Movement agreed to form government in May. This new coalition pledged to provide income tax cuts and to increase pension and welfare benefits.
Bond investors have now become alarmed about Italy’s budget discipline prospects. Italian government bond yields have surged higher over recent weeks .The yield spread between Italy’s 10 year government bond and the German government bond has widened to 2.9% (blue line) which is the largest spread since 2013.
This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) group of companies (“NAB Group”), 105–153 Miller Street, North Sydney 2060. An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties. Past performance is not a reliable indicator of future performance. This information is directed to and prepared for Australian residents only. MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.