This paper analyses the BTP-Bund spread evolution by focussing on the impact it has on public debt, banks, financial intermediaries, financial markets and the Italian economy during the period January-to-October 2018. In this regard, the BTP-Bund spread represents the difference between the yield of Italian bonds and that of German bonds on the respective 10-year maturities. The spread level undergoes fluctuations almost daily, which concretely indicates the risk inherent in the issuer and, therefore, the higher or lower level of the cost of new issues of public securities on the basis of the higher or lower level of the spread. The debt-to-GDP ratio, which is higher than 130 percent, simultaneously expresses an intrinsic weakness of the Italian economy regarding new production capacity wealth. This is a crucial result of low economic growth which increases the public debt level. This result can be ascribed to the economic policies pursued by Italian governments that have been negligent as to removing structural barriers, as well as dealing with serious financial crises since 2007 up to the present. The structural factors that impact negatively on economic growth in Italy are tax evasion, corruption, excessive bureaucracy, an aging population, an imbalance between north and south, and protracted judicial processes. The negative impact of the latter factor is estimated at around one percent of the GDP in a year period. In this context, the spread is an indirect measure of the ability of a state to repay the credit it received and, therefore, its insolvency risk. The spread is also a measure of investor confidence in the securities the state issued. A higher spread results in lower investor confidence in respect of public securities placed on the market and, as a consequence, higher spread increases the interest rates applied on public issues in the time frame taken into consideration. This, overall, has a negative impact on the total cost of debt. This indicates the importance of elaborating fiscal policies and economic policies that pursue control over the spread trend, which should be considered a variable that cannot move without due supervision. The increase in the spread and the consequent negative impact on the balance sheet asset values, and on the share values, imply asset losses for all investors in public securities, as well as for investors in the capital of banks and other financial intermediaries. The downgrade by rating agencies, at the same time, caused significant drops in asset values. Evidently, the high level of public debt is a serious problem that has been lingering for many years and weighs heavily on the Italian economy. Although there are remedies for the problem, the will to impose and bring them forward seems to be lacking. Despite a scenario of progressively increasing rates and yields, the increase and the instability in the performance of the 10-year BTP-Bund spread has caused negative repercussions on bank stability, which is essentially expressed by fluctuations in asset values, higher collection costs, and continued negative impact on the expansion of loans and public securities. Economic growth can be achieved by means of a strong push towards public and private investments through banks’ and financial intermediaries’ financial support and that of the financial markets. The importance of strengthening banking, insurance, mutual funds and financial markets has to be emphasised. Instability and increases in the spread that have occurred since the Conte government’s establishment do not provide good assumptions, but rather tend to complicate the situation, with risks leading to large-scale financial crises and economic recession in Italy.

The BTP-Bund spread: public debt, banks, financial intermediaries, financial markets and the economy in Italy

Fabiano Colombini
2018

Abstract

This paper analyses the BTP-Bund spread evolution by focussing on the impact it has on public debt, banks, financial intermediaries, financial markets and the Italian economy during the period January-to-October 2018. In this regard, the BTP-Bund spread represents the difference between the yield of Italian bonds and that of German bonds on the respective 10-year maturities. The spread level undergoes fluctuations almost daily, which concretely indicates the risk inherent in the issuer and, therefore, the higher or lower level of the cost of new issues of public securities on the basis of the higher or lower level of the spread. The debt-to-GDP ratio, which is higher than 130 percent, simultaneously expresses an intrinsic weakness of the Italian economy regarding new production capacity wealth. This is a crucial result of low economic growth which increases the public debt level. This result can be ascribed to the economic policies pursued by Italian governments that have been negligent as to removing structural barriers, as well as dealing with serious financial crises since 2007 up to the present. The structural factors that impact negatively on economic growth in Italy are tax evasion, corruption, excessive bureaucracy, an aging population, an imbalance between north and south, and protracted judicial processes. The negative impact of the latter factor is estimated at around one percent of the GDP in a year period. In this context, the spread is an indirect measure of the ability of a state to repay the credit it received and, therefore, its insolvency risk. The spread is also a measure of investor confidence in the securities the state issued. A higher spread results in lower investor confidence in respect of public securities placed on the market and, as a consequence, higher spread increases the interest rates applied on public issues in the time frame taken into consideration. This, overall, has a negative impact on the total cost of debt. This indicates the importance of elaborating fiscal policies and economic policies that pursue control over the spread trend, which should be considered a variable that cannot move without due supervision. The increase in the spread and the consequent negative impact on the balance sheet asset values, and on the share values, imply asset losses for all investors in public securities, as well as for investors in the capital of banks and other financial intermediaries. The downgrade by rating agencies, at the same time, caused significant drops in asset values. Evidently, the high level of public debt is a serious problem that has been lingering for many years and weighs heavily on the Italian economy. Although there are remedies for the problem, the will to impose and bring them forward seems to be lacking. Despite a scenario of progressively increasing rates and yields, the increase and the instability in the performance of the 10-year BTP-Bund spread has caused negative repercussions on bank stability, which is essentially expressed by fluctuations in asset values, higher collection costs, and continued negative impact on the expansion of loans and public securities. Economic growth can be achieved by means of a strong push towards public and private investments through banks’ and financial intermediaries’ financial support and that of the financial markets. The importance of strengthening banking, insurance, mutual funds and financial markets has to be emphasised. Instability and increases in the spread that have occurred since the Conte government’s establishment do not provide good assumptions, but rather tend to complicate the situation, with risks leading to large-scale financial crises and economic recession in Italy.
Colombini, Fabiano
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11568/949819
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