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Italians buy their government debt

D.The international financial world may again have become suspicious of Italian state finances and their financing – Italians are much less so. The issue of a new government bond with a maturity of eight years began at the beginning of the week. On the first day, savers signed 88,000 contracts between post offices, banks or at home at the computer, bringing 3.4 billion euros for the Italian state. The trick: the bond is protected from inflation. The state offers a variable return of 1.6% relative to the respective inflation rate (the latter being 6.8%).

There is also a loyalty bonus of 1 per cent of the invested capital if the bond is held for its entire duration. Private investors can still access it until this Wednesday. The documents will be offered to institutional investors on Thursday. Then you will have an overview of the entire willingness to invest. Since 2012, Italy has raised over € 171 billion through 16 issues of these inflation-linked bonds. The last spending round of May 2020 raised a good 22 billion euros. “Inflation protection is obviously very interesting these days,” said Angelo Drusiani, financial advisor to Edmond de Rothschild, in an interview.

Italy has the second highest debt in the euro area after Greece with around 150 per cent of gross domestic product (GDP). The Bank of Italy has acquired the vast majority of new issues over the past decade on behalf of the European Central Bank (ECB). This should now end, as the ECB announced along with the interest rate hike. Investors quickly feared that Italy would not be able to find enough buyers on the open market for its government bonds in the future, and yields soared. The ECB reacted to this with an emergency meeting and reiterated in several public statements that it would not tolerate widely diverging interest rate differentials in the euro area. This has calmed the markets down a bit for the moment. On Wednesday, the risk premium (“spread”) of the 10-year government bond relative to the corresponding federal bond was less than 2.00 percentage points, about 0.5 points less than a week ago.

But the nervousness has not passed, especially since it is not clear how the ECB intends to combat “fragmentation” in the euro area. Are market interventions linked to the condition of structural reforms? So far Italy has fought tooth and nail. Support for populist parties from the far right to the far left was also based on this rejection of a dictation from Brussels or Frankfurt. Investors’ doubts therefore affect Italy’s political risks. What happens when the expert, largely non-partisan government led by Prime Minister Mario Draghi resigns after next spring’s parliamentary elections?

In the short term, investors look to the overall economic situation. The government and international institutions such as the International Monetary Fund and the OECD believe that growth of 2.5-2.6% this year is possible; it would be much more than estimated for Germany. In 2023, however, independent economists predict a noticeable decline in the growth rate. Because the war in Ukraine, the planned move away from gas from Russia, which has been very important so far, and inflation are making their mark. Of course, rising prices also contribute to debt reduction, depreciating debt and increasing nominal GDP. This is one of the reasons the government expects total national debt to drop from just under 151 percent to 147 percent this year. However, it is also important to note that the government must pay investors higher yields on inflation-linked bonds.

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