What are bond markets saying about Italy? With my usual proviso that markets are best understood as shoals of piranhas, communicating moods of panic, indifference, bloodlust and satiety rather than coherent ideas, the relatively clear message earlier this week was that Italian government bond yields were perilously close to the threshold of panic.
That threshold is widely deemed to be 7 per cent, more than 4 per cent above benchmark yields for German, French and Dutch debt. Let me try to put this in perspective. The incremental interest cost to the Italian treasury is about €2 billion per percentage point per year, which doesn’t sound too terrifying. Italy has more debt than Spain, Portugal, Ireland and Greece combined, making it too big to be bailed out with the resources at the EU’s disposal, but unlike Greece it also has a productive private sector and a primary budget surplus before debt costs. Cumulative higher debt costs will erode any last traces of growth, however, in turn shrinking tax revenues and fuelling deficits. And bond-market technicalities combined with investor flight mean that, once the threshold of panic has been passed, yields will rise more steeply still.
In those circumstances, central bank bond-buying to hold yields down can have only temporary impact and the necessary ammunition will soon be exhausted. Then another threshold will be reached, at which there is no longer a market in which Italy can borrow new money at all. But Italy needs to raise €50 billion before the end of the year, and its next bond auction is scheduled for 14 November. If nothing has changed by then — as the jealous husband sings at the end of Pagliacci after stabbing his wife and her lover — ‘la commedia è finita’.
Silvio Berlusconi never sang bel canto opera, but perhaps in his days as a cruise-ship crooner he belted out that old Doris Day number ‘Que Sera Sera’, a cod-Spanish rendering of the Italian ‘che sarà, sarà’, or ‘whatever will be, will be’.
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