Commentary
Uri Dadush
{
"authors": [
"Uri Dadush"
],
"type": "other",
"centerAffiliationAll": "",
"centers": [
"Carnegie Endowment for International Peace"
],
"collections": [],
"englishNewsletterAll": "",
"nonEnglishNewsletterAll": "",
"primaryCenter": "Carnegie Endowment for International Peace",
"programAffiliation": "",
"programs": [],
"projects": [],
"regions": [
"Western Europe",
"Europe",
"North America"
],
"topics": [
"Economy",
"EU"
]
}
Source: Getty
Other
Future of Italian Bond Spreads
With Italy’s high debt, low long-term growth rate, and inflation, the country must run a primary surplus of around 5 percent on a sustained basis in order to keep its debt/GDP level from spinning out of control.
By Uri Dadush
Published on Nov 18, 2011
What is going to happen to the Italian bond spread?
I expect Italy’s spreads to remain near their current, extremely high levels in coming months. And given the loss of confidence in the eurozone’s and Italy’s ability to contain the crisis, European Central Bank (ECB) intervention—or the expectation of its intervention—is almost certainly the only thing stopping the Italian bond spreads from reaching even higher levels.
I expect that the ECB will ensure that Italian yields do not go much higher because if they did, not only Italy’s but also the euro’s future would be put at very serious risk. Nor will spreads move much lower soon: it would be difficult for Italy to quickly regain the confidence of markets given all the political uncertainties and the strong possibility that its economy will go into a credit-crunch-induced recession. It is unlikely that the ECB will intervene to lower Italian bond yields significantly because that would take the heat off Italy’s politicians to support the new government of Mario Monti as it attempts to enact far-reaching reforms.
I expect that the ECB will ensure that Italian yields do not go much higher because if they did, not only Italy’s but also the euro’s future would be put at very serious risk. Nor will spreads move much lower soon: it would be difficult for Italy to quickly regain the confidence of markets given all the political uncertainties and the strong possibility that its economy will go into a credit-crunch-induced recession. It is unlikely that the ECB will intervene to lower Italian bond yields significantly because that would take the heat off Italy’s politicians to support the new government of Mario Monti as it attempts to enact far-reaching reforms.
Read more
Interest rates on Italian ten-year bonds have already hit 7 percent. That means, with Italy’s high debt, low long-term growth rate, and inflation, the country must run a primary surplus of around 5 percent on a sustained basis in order to keep its debt/GDP level from spinning out of control. Such sustained budget surpluses have rarely been seen and appear highly implausible, especially given the Italian political context. So, though Italy can afford them over a short period, interest rates at this level cannot persist indefinitely.
About the Author
Uri Dadush
Former Senior Associate, International Economics Program
Dadush was a senior associate at the Carnegie Endowment for International Peace. He focuses on trends in the global economy and is currently tracking developments in the eurozone crisis.
- The Labors of Tsipras
- Greece, Complacency, and the EuroIn The Media
Uri Dadush
Recent Work
Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.
More Work from Carnegie Europe
- The Fog of AI WarCommentary
In Ukraine, Gaza, and Iran, AI warfare has come to dominate, with barely any oversight or accountability. Europe must lead the charge on the responsible use of new military technologies.
Raluca Csernatoni
- How to Join the EU in Three Easy StepsCommentary
Montenegro and Albania are frontrunners for EU enlargement in the Western Balkans, but they can’t just sit back and wait. To meet their 2030 accession ambitions, they must make a strong positive case.
Dimitar Bechev, Iliriana Gjoni
- Taking the Pulse: Can NATO Survive the Iran War?Commentary
Donald Trump has repeatedly bashed NATO and European allies, threatening to annex Canada and Greenland and deploring their lack of enthusiasm for his war of choice in Iran. Is this latest round of abuse the final straw?
Rym Momtaz, ed.
- On NATO, Trump Should Embrace France Instead of Bashing ItCommentary
Donald Trump’s repudiation of NATO goes against the Make America Great Again vision of a U.S.-centered foreign policy. If the goal is to preserve the alliance by boosting Europe’s commitments, leaning into France’s vision is the most America First way forward.
Rym Momtaz
- Europe Doesn’t Like War—for Good ReasonsCommentary
The wars in Ukraine and the Middle East are existential threats to Europe as a peace project. Leaders and citizens alike must reaffirm their solidarity to face up to today’s multifaceted challenges.
Marc Pierini
