The situation of the Italian debt in seven graphs

Rome's finances are on a more secure footing from this crisis as successive governments have taken advantage of historically low interest rates to secure cheap financing.

But after the country's anti-establishment government announced fiscal plans matching a broader deficit target, two-year bond yields reached 1.8% last week, while they were below zero in May, according to Refinitiv, raising the cost of borrowing in a country. which has one of the largest piles of public debt in the world. This comes at a time when the European Central Bank, the largest buyer of Italian debt in recent years, should soon complete its purchases of bonds, asking who will intervene when it disappears.

Italian bonds rallied on Monday after Moody's Investors Service lowered the country's credit rating on Friday to the lowest credit rating, but had not planned to lower it further for the time being. Nevertheless, investors expect the markets to remain turbulent as the Italian government continues to focus on the EU with its budget plans.

"You can not fight the market. We have seen it time and time again in history, "said Robert McAdie, global head of fixed income strategy and research at

BNP Paribas
.

Mr. McAdie said the critical point for Rome would probably be when the yield on two-year bonds would be about 3 to 4 percentage points higher than the German preferred debt. "They will eventually have to capitulate" if the market concerns about the spiral of debt sustainability, he added.

While investors are wondering if Rome will back down, here are some of the questions they are asking themselves.

What is the state of the current situation?

It's not bad.

Bond yields have risen sharply in recent weeks as investors liquidate Italian debt.

According to analysts, market prices had already hinted that rating agencies would downgrade Italy by at least a notch to a level above the investment grade even before Moody 's. It did not happen on Friday.

This is an important threshold. Analysts at BofA Merrill Lynch said that a downgrade to junk would trigger at least € 80 billion ($ 92 billion) in forced sales, which "would trigger a terrible spiral of events."

This partly explains why Italian bond yields fell on Monday, as Moody's changed the outlook for its stability ratings, suggesting that a further cut is not imminent.

Until recently, investors were willing to neglect Italy's huge debt, which is higher relative to GDP than any other country in the European Union, with the exception of Greece. This is because the government generated a primary surplus, that is, it brought in more taxes than it had spent, excluding interest expense. This should change in the latest Rome budget, which forecasts a deficit of 2.4% of GDP next year.

It sounds pretty bad …

Yes, but there are mitigating factors.

The extremely accommodative monetary policies of the ECB have reduced borrowing costs in Italy and the euro area.

The average yield on the Italian debt at the time of the sale was 0.7% last year, compared to 3.2% in 2011, according to the Italian Treasury. In 2017, the average maturity of Italy's debt stock was 6.9 years, compared to 6.4 years in 2014 and 5.2 years in 1998 before the creation of the euro.

This means that Italy will not face a financial chasm in the coming months, although it still has a large debt to refinance. Nearly 200 billion euros of Italian bonds will mature next year. At the same time, the government's budget deficit target implies an additional loan of 57 billion euros, according to

UniCredit
.

This means that it will have to issue around 260 billion euros in 2019, 25 billion euros more than expected this year.

Who is responsible for the Italian debt?

Mainly premises. Foreigners hold only about 25 percent of the public debt, according to a report released earlier this year by UniCredit. The rest is held by Italian banks, insurance companies, pension funds, independent investors and, of course, by the ECB and the Bank of Italy. The large holdings in Italian banks explain why stocks in the sector, in particular, were under pressure when government bond prices fell.

Nevertheless, some investors are worried about this strong local ownership. The fact that foreigners have already sold so much means that these obligations may already be positioned for the worse.

He also pushes [the government] to run on the debt. If you collapse your bonds, you collapse the banks, the insurance companies "as well as the savers, said Robert Tipp, chief strategist at PGIM Fixed Income.

Does this mean that Italy can weather the storm?

Chiara Cremonesi, a strategist at UniCredit, modeled how the average cost of Italian debt could change next year on the basis of three scenarios. First, Italian bonds remain at the same levels as at the beginning of October. Second, the situation is getting worse and yields are up 1.5 percentage points overall. Third, funding costs are returning to their level in the first half.

Cremonesi's conclusion: Italian bond markets should face a "significant and lasting shock" for funding costs to rise significantly.

Remains the great unknown who will continue to lend money to the Italian government. While many Italian debt sellers have been selling in recent years, there has been only one regular buyer: the European Central Bank. And it is planned to stop shopping by the end of 2018.

"It's not so much a question of the dynamics of the cost of debt. The big question is what kind of investors will buy the debt next year "and what price they will ask for, said Ms. Cremonesi.

Write to Christopher Whittall at [email protected]