Italy Economy Real Time Data Charts

Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Italy related comment. He also maintains a collection of constantly updated Italy economy charts together with short text updates on a Storify dedicated page Italy - Lost in Stagnation?

Thursday, March 06, 2008

Italian Government Bond Yields 2008 - The Growing Risk Premium

One point which it may well be interesting to watch for as we move through 2008 is the way in which the eurosystem evolves under strain. One particular point of interest will be the emergence of a yield differential for the Spanish banking system, another will be the performance of the "spread" on Italian government debt.

With this in mind it is worth noting that the difference in yield between Italian 10-year bonds and the benchmark German bunds increased to the most in almost a decade earlier this week. The spread between German and Italian bonds widened to 52 basis points on Tuesday, the most since October 1998, when it was as much as 61 basis points.

The European Commission halved its 2008 growth forecast for Italy on Feb. 21, saying slumping confidence and rising prices may push the Italian economy to the brink of recession. The economy will grow 0.7 percent this year, the European Union's Brussels-based executive body said, revising down a November forecast of 1.4 percent growth.

The spread between the 10-year bund, the euro region's benchmark, and similar-maturity Greek bonds also widened to the most since 2001. Greek notes yielded 52 basis points more than similar-maturity bunds, 5 basis points more than Monday and the widest spread in almost seven years.

Italy's long-term foreign-currency debt is currently rated Aa2, the third-highest investment-grade rating, by Moody's Investors Service and two steps lower at A+ by Standard & Poor's. Greece is rated A1 by Moody's, its fifth-highest rating, and one ranking lower at A by S&P.

The UK Daily Telegraph had an article on this topic. They made the following reasonably valid points:

Investors sold Italian and Greek debt yesterday in signs of near panic liquidation, driving bond spreads to the highest level since creation of the single currency.The yields on Italian 10-year government bonds reached 52 basis points above German Bunds, approaching levels that risk setting off a self-reinforcing spiral of investor flight.

The wild moves on the euro-zone bond markets came as gold plummeted by $29 an ounce to $957 on automatic stop losses and forced selling by funds. Crude oil futures tumbled almost $3 a barrel in New York.

The Dow Jones index fell 226 points at one stage.

Mounting evidence that Italy is sliding into recession have raised fears of a ballooning fiscal deficit, putting the country’s debt trajectory on an unsustainable course. The collapse of Romano Prodi’s government has left Rome in limbo and raised doubts about the viability of economic reform.

The rating agencies have already downgraded Italian debt twice. A growing number of banks have advised clients to take “short” bets against Italian debt, including Goldman Sachs and BNP Paribas.

Simon Derrick, currency strategist at Bank of New York Mellon, said flow of funds data show that foreign investors have suddenly liquidated half the Italian and Greek governments bonds accumulated over the last four years.

He said the markets were starting to price in risk that these countries would be hit much harder than Germany by the strong euro and a cyclical downturn. Brussels has halved its growth forecast for Italy to 0.7pc this year.

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