Italy's Debt Looks More Sustainable

Posted by: Ben Vickers on December 12, 2011

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Italy’s paying more to borrow money, but exactly how much more the government will end up paying to finance itself over the next few years isn’t easy to assess—and it’s certainly more involved than simply looking at the yield from the latest auction.

The Bank for International Settlements has reported its own sums that suggest the debt pile Italy has worked up isn’t as costly as some of the yields headlined lately suggest. Indeed, the BIS says the country “should be able to withstand elevated yields for some time, provided it retains access to the market,” as Anchalee Worrachate reports.

So what yield is sustainable for a country with Italy’s demographic (a rapidly aging population) and debt profile (a debt-to-GDP ratio of 120 percent)? The BIS says Italy’s borrowing costs are sustainable through at least 2014, based on three possible scenarios. The worst assumption is that yields stay 500 basis points above their 2007 pre-crisis rate for the next three years—which would mean yields on almost all maturities of more than 9 percent. The additional financing costs payable by Italy work out at a little more than 2 percent of GDP, according to the BIS. This compares with plans to cut government debt by the equivalent of 12 percent of GDP over the next three years, announced by Prime Minister Mario Monti on Dec. 4.

The bank calculates that if yields stayed at where they were on Nov. 9, that is between 6 percent and 8 percent over most maturities, the “additional yearly cost would amount to 0.95 percent of 2010 GDP.”

Now consider today’s bond auction: Italy sold 7 billion euros ($9.3 billion) of one-year bills, the maximum for the auction, and borrowing costs declined, Jeffrey Donovan reports:

The Rome-based Treasury sold the bills to yield 5.952 percent, down from 6.087 percent at the last auction on Nov. 10, which was the highest in 14 years. Demand was 1.92 times the amount on offer, compared with 1.99 times last month.

Italy isn’t about to sink under its debt mountain, even with yields as high as they are. Not just the BIS but also the demand at this latest auction corroborate that.

Photographer: Victor Sokolowicz/Bloomberg

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Financial markets are on the edge as investors await a solution to the European debt crisis. This blog examines the banks that hold billions of euros worth of Greek, Italian, and other sovereign debt; the governments that must pay off or refinance that debt; and the implications for the worldwide financial system if they can't.

Analyses or commentary in this blog are the views of the author and or commentators, and do not necessarily reflect the views of Bloomberg News.

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