Monday, October 24, 2011

Italian Interest Rates

Loss of confidence in Italian debt seems to be slowly worsening - the above shows the yield on the ten year bond from Bloomberg.  Note that the graph is not zero-scaled.  The spike in July was caused by a squabble between Prime Minister Burlusconi and Finance Minister Tremonti.  It ended when the ECB intervened, but now interest rates have risen almost to the peak level notwithstanding continued ECB involvement.

A reminder on some of the background.  Italy has the third largest government debt market in the world (after the US and Japan).  This is due to its high level of debt/gdp:

Note that the Italian government was slowly working the debt down in the late nineties and early 2000s, but then it increased since the 2008 crisis and that has been enough to cause the present loss of confidence.  To me this is an object lesson in why countries shouldn't run at too high a level of public debt - the world is a dangerous place and you never know when some crisis might come along and force your debt over the threshold of what markets will tolerate.  Obviously it's a particular problem when you don't have your own central bank.

It's also a problem when the economy is barely growing:

As further cuts in the budget are required, it's hard to see how rapid growth can begin now.

1 comment:

cimon9999 said...

I believe we're looking for some expansionary austerity i.e. the cuts will continue until morale imrpoves!

For some anecdotal evidence of Italy's weakening economy, diesel demand is declining after stabilising last year (