The Italian government’s borrowing costs have surged to inauspicious territory. The nation is getting punished in the bond market as the incoming populist government coalition seems ready to boost spending without much regard for European Union budget strictures and mulls the potential creation of assets tantamount to a parallel currency.
The result: An Italian note maturing in February 2028 now yields 10 basis points more than a euro-denominated sovereign from Indonesia due four months later, Bloomberg reported.
While it’s never a good sign for a developed country to be paying more to borrow than an emerging counterpart, the comparison with Indonesia is particularly grim given that the Southeast Asian country has been among the most-battered during the recent market downdraft for developing nations.
The benchmark stock index slumped to an 11-month low while the rupiah has tumbled 4% against the greenback in 2018 to hit its weakest level in more than two years.
Bulgaria and Hungary also have euro-denominated debt due between 2026 and 2030 that yields less than Italy’s. Colombia does as well—and to add insult to injury, that nation actually managed to qualify for the 2018 FIFA World Cup.
Other countries designated as emerging markets with euro-denominated bonds maturing in this span with borrowing costs lower than Italy’s include Chile, Mexico, Latvia, Lithuania, Peru and Poland. S&P Global Ratings judges those countries to be more creditworthy than the Mediterranean nation.
Italy’s populist government-in-waiting poses a risk to the country’s credit profile, rating agency Fitch has warned.
Political risk was “a key factor in our downgrade” of Italy to BBB last year, Fitch said in a statement on Monday that highlighted “fiscal loosening and potential damage to confidence” as key factors it will be watching.
The extent to which these affect Italy’s credit rating, “will depend on the government’s ability to implement its program and how it resolves trade-offs between different elements”, Fitch said.
