The Italian government has to take steps to curb the soaring cost of borrowing, possibly sooner than the ruling coalition government hints.
Italy's economy minister this month promised to take all necessary steps if the yield gap between 10-year and German comparable bonds widens to 400 or 500 basis points. This yield gap is in fact a risk premium for Italy's bonds. As the market has absorbed quite a lot of risk factors, the spreads are unlikely to increase further.
But parliamentarians'comments suggest that the issue remains a controversial issue in Italy's spending plans. Vice Premier Salvini has vowed to widen the budget deficit, regardless of what bond investors who determine spreads will think.
These remarks highlight the importance of the spreads and the extent to which the Italian government will not tolerate them.
The Italy / German spreads are now about 305 basis points, approaching the broadest level in five years. The spread widened 150 basis points this year, the biggest increase since 2011, as Roma's budget plan strained relations with the European Union and put Italy at risk of a downgrade.
But some market observers say the danger threshold is closer to 350-360 basis points than the 400-500 basis points mentioned by Italian officials. They point out that spreads at these levels, equivalent to yields on Italian 10-year bonds around 4 per cent, could trigger a sharper rise in borrowing costs and spread to other eurozone countries.
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