Italy’s record bond yields are sending the nation down the same path taken by Greece, Portugal and Ireland in the days before they were forced to seek rescues.
Italy’s 10-year notes traded above 5.5 percent for 40 days before breaching the 6 percent mark on Oct. 28 and reaching as much as 6.68 percent today. The bailed-out nations followed a similar trajectory, consistently averaging above 6 percent for about a month before crossing the 6.5 percent barrier. After that, it took an average of 16 days for yields to pass the unsustainable 7 percent level.
“The trend appears worryingly similar,” said Riccardo Barbieri, chief European economist at Mizuho International Plc in London. “Clearly, the longer it lasts, the worse it gets.”
With almost 1.6 trillion euros ($2.2 trillion) of bonds outstanding, Italy has more liabilities than Spain, Portugal and Ireland combined, making it vulnerable to increases in borrowing costs. Prime Minister Silvio Berlusconi triggered the latest surge in yields after bowing to domestic demands to water down a 45.5 billion-euro austerity package.
Yields on Italy’s bonds rose even as the European Central Bank bought the securities. Italy’s 10-year borrowing costs have soared to a euro-era record of 473 basis points more than German bunds, the benchmark for Europe. Germany is able to borrow at a yield of 1.8 percent for 10 years, less than a third of the 6.52 percent Italy has to pay.
The cost of insuring Italy’s debt using credit-default swaps surged to 518 basis points today, approaching the record 534 reached in September, according to CMA. The contracts, whose cost has jumped from 405 basis points at the end of last month, rise as a borrower’s creditworthiness worsens.
“The acceleration in Italy’s bond yields is very, very frightening,” said Gary Jenkins, the head of fixed income at Evolution Securities Ltd. in London “It’s surprising how quickly a difficult situation can become an impossible one. Politicians always think they have lots of time, but when the market decides to withdraw support, it can do so very suddenly.”
Italy has to refinance 37 billion euros of bills and bonds by year-end and another 307 billion euros in 2012, Bloomberg data show. The nation pays an average of 4.15 percent for its debt, meaning next year’s interest payments will cost about 12.7 billion euros out of a total 54.4 billion-euro interest tab.
Refinancing next year’s maturities at 7 percent would cost about an additional 8.7 billion euros.
An increase of 1 percentage point in the nation’s borrowing costs boosts the interest bill by 0.2 percent of gross domestic product in the first year, 0.3 percent in the second and 0.5 percent in the third, said Mizuho’s Barbieri, citing Bank of Italy calculations. Yields are now more than 2 percentage points higher than the average since the inception of the euro.
“Italy will be difficult, very difficult,” said Mirko Santucci, the Italian-born head of credit at Swisscanto Asset Management AG in Zurich, which manages the equivalent of about $42 billion in fixed income and credit. “The government there has to take important decisions and we don’t see it being able to do that. That said, while I can imagine a Europe without Greece, I can’t imagine a Europe without Italy.”
Giuliano Ferrara, editor of newspaper Il Foglio and a former spokesman for Berlusconi, reported today that the prime minister may step down within hours and push for early elections. The beleaguered premier said yesterday he’s confident he has a parliamentary majority after two allied lawmakers defected to the opposition, and that he aims to complete his mandate through 2013.
“The government’s internal divisions remain the main problem for a country that now, more than ever, needs stability and credibility,” said Annalisa Piazza, a fixed-income strategist at broker Newedge Group in London.
Berlusconi faced calls from the opposition to quit, and allies requested he broaden the backing for the government, after he announced Nov. 4 that he asked the International Monetary Fund to monitor Italy’s debt-reduction progress, while rejecting an offer of financial help.
The prime minister, who delayed the release of his latest album of love songs because of the euro-region crisis, has been distracted from governing as he faces trial on charges of corruption, fraud and paying for underage sex. He denies any wrongdoing.
Standard & Poor’s and Moody’s Investors Service both cited political instability and rising borrowing costs as risks to Italy meeting its fiscal goals when they downgraded the nation on Sept. 19 and Oct. 4.
Even so, investors shouldn’t draw too many parallels with what happened to smaller, less-diversified economies when they look at Italy, said Fabio Fois, a European economist at Barclays Capital in London.
“Investors want to see Italy doing the right thing,” said Fois. “The Italian economy is different and far larger, so the same yields don’t necessarily imply the same outcome as in Greece, Ireland and Portugal.”