Italy Faces Mounting Debt Challenges as Public Finances Deteriorate

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Italy Faces Mounting Debt Challenges as Public Finances Deteriorate

  • MILAN/ROME (Reuters) - In a stark sign of economic distress, Italy has raised its estimate for debt issuance in 2023, becoming the only major euro zone country to do so. The decision comes as Rome grapples with worsening state finances and delays in receiving much-needed funds from the European Union (EU). The move is raising concerns among investors about Italy's economic stability and fiscal discipline.

  • The Italian Treasury, in its fourth-quarter issuance program released recently, increased its estimated gross debt issuance for the year to 333 billion euros ($351.95 billion). This is significantly higher than the initial forecast of 310-320 billion euros made at the beginning of the year. Italy already carries a staggering 2.85 trillion euros in public debt, the second-highest in the euro zone relative to gross domestic product (GDP), trailing only behind Greece.

  • In contrast, other European countries have taken different approaches this year. Germany reduced its debt issuance needs for the fourth quarter by 31 billion euros ($32.59 billion), while Portugal and the EU also scaled back their plans. France increased its bond issuance for the next year but maintained its current-year targets.

  • The Italian government's debt troubles are further exacerbated by its struggles to meet policy conditions set by the European Commission in exchange for post-pandemic Recovery Funds. Analysts at JP Morgan have predicted that delays in receiving a long-overdue second tranche of EU funds will necessitate additional Treasury bill or bond issuance this year to cover the temporary funding shortfall.

  • Despite the mounting debt challenges, forecasts approved by the Italian government suggest that the debt-to-GDP ratio will remain stable at around 140% from 2023 to 2026. This is in stark contrast to the European Union's pre-pandemic budget rules, which required member states to reduce their debt levels towards 60%.

  • The latest Economic and Financial Document from the Italian Treasury, issued on Saturday, projects 23.5 billion euros in measures through 2025 to be financed through extra budget deficits.

  • Meanwhile, Italy's borrowing costs are surging. The spread between Italian and German 10-year yields, a key indicator of market sentiment toward high-debt Italy, reached 200 basis points in early London trade on Friday, the highest level since March. At Italian auctions, 10-year BTP yields hit their highest level in 11 years.

  • As of the end of August, Italy's average cost of funding stood at 3.62%, the highest level since 2008, up sharply from 1.71% in 2022.

  • Despite these challenges, Prime Minister Giorgia Meloni expressed confidence on Friday, stating that she is not worried about the recent rise in Italian bond yields.

  • For the fourth quarter, the Italian Treasury anticipates gross issuance of medium and long-term bonds at around 60 billion euros, with net issuance, after redemptions, projected at a negative 12 billion euros over the same period.

  • [Note: Currency conversion used: $1 = 0.9462 euros]





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