In an already particularly tense moment for Italy, another tile on our heads comes from Great Britain. The bitter “Italian” awareness of an unprecedented energy crisis, an economic stress with incalculable long-term effects, and skyrocketing inflation with generalized and unsustainable price increases for most Italian families was not enough: after the increase of 13 7% in November, since 1 December gas bills have risen by 23.3% in the protected market, so much so that the National Consumer Union has spoken of “heart attack bills” and a real “Caporetto” (all the data on gas increases here, what instead increases more here).
The alarm raised by the Financial Times is now added to this already extremely precarious picture. Nine out of 10 economists in a Financial Times poll identified Italy as the eurozone country “most at risk of an uncorrelated sell-off in its government bond markets.” Italy – writes the FT – is the eurozone country most exposed to a debt crisis, given that the European Central Bank has raised interest rates and bought fewer bonds in the coming months.
The Meloni government is trying to keep the accounts in order, rearranged after years by Draghi, forecasting that the deficit-GDP ratio will drop from 5.6% in 2022 to 4.5% in 2023 and 3% in 2024. But the problem is that our public debt remains one of the highest in Europe, just over 14% of GDP. It is precisely the needs to refinance the Italian debt and the certainly not rosy political situation that have made our country more vulnerable to a sell-off in the bond markets.
Italy’s borrowing costs have increased significantly since the ECB started raising interest rates last summer. The 10-year bond yield soared above 4.6% last week, nearly quadrupling its year-ago level and 2.1 percentage points above the equivalent yield on German bonds.
Meloni expressed dismay at the ECB’s willingness to continue raising rates despite the risks to growth and financial stability. “It would be useful if the ECB managed its communication well, otherwise it risks not generating panic but fluctuations on the market that frustrate the efforts that governments are making,” he said in the press conference at the end of the year.
The situation could even worsen as growth slows, interest rates rise further and debt issuance resumes.
The ECB has insisted that they will continue to raise rates in half point increments during the first few months of this year. Klaas Knot, Dutch central bank governor and one of the hawks on the governing council, told the FT that the central bank was just starting the “second half” of its rate-hiking cycle.
However, analysts believe the ECB is overestimating the risks to inflation and underestimating the prospect of a recession. IMF chief Kristalina Georgieva said over the weekend that half of the EU will be hit by recession this year. Four-fifths of 37 economists polled by the FT in December expect the ECB to stop raising rates in the first six months of 2023 and two-thirds predict it will start cutting rates next year in response to weaker growth.
On average they have forecast that the ECB’s deposit rate will peak at just under 3%, below the level investors are betting on, as indicated by the price of interest rate swaps.
A separate FT survey of more than 100 leading UK-based economists said Britain would weather one of the worst recessions and weakest recoveries in the G7 in 2023.
Central banks around the world sharply raised rates to tackle inflation, which soared to multi-year highs in many countries, as energy and food prices soared after Russia’s invasion of Ukraine and the end of the lockdowns of the coronavirus pandemic have pushed up the demand for goods and services.
The ECB has been slower than many Western central banks to start raising rates, but since last summer it has tightened policy at an unprecedented pace, taking the deposit rate from minus 0.5% to 2% in six months.
“The ECB has been too slow [nel] recognize that inflation was not temporary, but is now catching up,” said Jesper Rangvid, professor of finance at Copenhagen Business School. “I’m still afraid, though, that the ECB won’t tighten enough due to the problems that would cause in Italy.”
The ECB is expected to start reducing its €5bn bond portfolio by €15bn a month from March, only partially replacing maturing bonds, putting further upward pressure on Italy’s borrowing costs.
Italian cabinet ministers have criticized the ECB for its aggressive monetary tightening. Defense Minister Guido Crosetto tweeted that the ECB’s policies “made no sense” while Deputy Prime Minister Matteo Salvini said higher rates “will burn through billions of Italian savings”.
The ECB has unveiled a new bond-buying scheme, known as a transmission protection facility, designed to address an unwarranted rise in a country’s borrowing costs. However, more than two-thirds of economists polled by the FT in December said they expect the ECB never to use it.