LA STAMPA

Talkin' Italian 10-Year Bond Spread Blues

The state of the health of Italy's economy is of serious global concern. Who do you believe?

No coins to toss in the Trevi fountain
No coins to toss in the Trevi fountain
Marco Zatterin

-OpEd-

TURIN — If you think that J.P. Morgan is just another agent of the villains of international finance under the command of Public Enemy No. 1, George Soros, close this page.

If, instead, you think that there is even a chance that they are a team of economists and analysts that are trying to do their job — and maybe that they say things worth considering about the Italian economy — look at the graph below on the so-called "Spread," the difference between Italy's and Germany's 10-year bond yields.

They say that if the relationship between the deficit and GDP exceeds 2%, the difference between interest rates on 10-year Italian treasury bonds and their German cousins will reach 250 basis points — a standard unit of measurement for interest rates — which would bring it back to this summer's levels, complicated but sustainable. J.P. Morgan, however, maintains that at 2.5% the 300-point spread would be exceeded, and at 3% it would reach a 400-point spread.

You need to verify the words of JP Morgan.

At this point my mother's barista would ask, "Where's all this coming from?"

An easy response. The Italian Parliamentary Budget Office has calculated (citing the excellent Dino Pesole from Il Sole 24 Ore) that with the shock of lowering 100 basis points across the yield curve (from January 2018, and for the whole period of the budget forecast, therefore to the end of 2020), the interest expense would rise by about 1.8 billion euros in the first year, 4.5 billion in the second year, and 6.6 billion in 2020. As a result, the fiscal deficit would rise by 0.1, 0.3, and 0.5 percentage points of GDP respectively. It's not difficult to predict what would happen if the spread increased by 200 basis points, and so on.

So if we push the deficit to 2.5%, compared to the 1.6% that Economy Minister Giovanni Tria hopes for, we would have spending margins about 14 billion euros higher, but we have to expect 12.9 billion in disbursements in three years. This is in hoping that the structure of interest rates would remain unchanged — which is improbable.

If you've reached this point, it means that you think you need to verify the words of J.P. Morgan.

So you have two options. You could convince yourself that they're all slaves of Mr. Soros and toss this article away. Or, you could consider that it's better to remain vigilant in controlling the trend of Italy's deficit — reducing the debt that weighs on our shoulders — and that it might be a good idea to share it with friends or enemies. And maybe, that making ends meet means spending more money than you can get with this change of course without considering the knock-on effects on companies and banks of a deeper loss of confidence in the Italian system. We just hope someone can make the government understand.

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