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MNI (London)
By Silvia Marchetti
     ROME (MNI) - Italy must continue along a path of fiscal adjustment to
consolidate credibility and reassure investors that lend Rome some E400 billion
annually, despite being offered some protection from future tighter future
monetary policy by the lengthened maturity profile of its current debt, a senior
Bank of Italy source told MNI in exclusive comments.
     In their latest Financial Stability Report, the Bank of Italy said future
debt issuance costs will remain stable if Rome's fiscal targets are met and the
economic recovery continues, thus limiting an risks from the normalisation of
monetary policy.
     The central bank warned, however, that the high public debt makes Italy
vulnerable to tensions on the financial markets and to downward revisions of
growth prospects. 
     There are key debt reimbursement deadlines ahead. By December of this year,
what were issued at medium and long-term securities amounting to E134 billion
will reach maturity, with a further E201 billion set to mature in 2019. 
     Their roll-over on low coupons will depend on the continuation of both
favourable market conditions and investors having confidence in the
sustainability of Italian public debt, the source argued, both of which are key
to guaranteeing continued funding. 
     Italy's debt outlook looks stable at the moment, despite the current
political situation, but it is paramount that its downward trend as a percentage
of GDP continues to be believed by markets in order to limit future risks. 
     The fact that the European Central Bank will eventually switch to policy
normalisation mode and, at some point down the road, raise interest rates, is
not in itself a source of concern or an issue that will negatively impact on
Italy's debt sustainability -- but only as long as growth continues at healthy
levels, said the BOI source. 
     There are three main potential obstacles in the path to a lower overall
debt pile; lower than expected economic growth; if fiscal policy deviates from
its set path; if the current primary surplus buffer drops. 
     A further risk could be "market glitches" like the ones seen in 2011-2012,
triggering a sharp spike in the yield spread against German Bunds -- a condition
currently neither present nor close, but events in recent days have underlined
just how live that risk is. 
     "There is a safety headroom that acts as buffer for a potential rate hike
impact. Even if the new rates (on new bonds) increase by 2 percentage points,
overall debt cost will not rise. In the worst case scenario, it would just slow
down in the pace of decline but would still keep at stable levels," the source
     Italy started 2018 off with a slightly lower growth rate, in line with much
of the Eurozone, but it is seen as only a temporary slowing in pace and largely
weather-related. The Bank of Italy's recent growth predictions are in line with
those of the outgoing Democrat-led government, that has forecast GDP growth at
1.5% for this year.  
     The crucial point the central bank is trying to get across is that any
change in interest rates dynamics must be counterbalanced by equal growth
     According to the BOI, after increasing by more than 30% since the beginning
of the financial crisis, Italy's debt-to-GDP ratio has remained broadly stable
over the last three years, thanks to the pick-up in growth and to persistent
primary surpluses.
     And, the source noted, such a favourable outlook should be firmly grasped
to further fiscal progress and boost the reform progress.  
--MNI London Bureau; tel: +44 203-586-2225; email:
[TOPICS: MFIBU$,M$E$$$,M$I$$$,M$X$$$,MC$$$$,MI$$$$,MX$$$$,M$$EC$,MFX$$$,MGX$$$]
MNI London Bureau | +44 203-865-3812 |