CHART OF THE WEEK
Italian debt has been under pressure since the populist Five Star Movement and League coalition came to power. Before the elections, the gap between German and Italian bond yields was approximately 120 bps. By the end of May, it had increased to 200 bps. And since the Italian government defied European Commission deficit requirements by announcing a 2.4% budget deficit target for 2019, the gap has widened to around 300 bps.
Back in May, the effects of the Italian government announcement were visible on both Spain and Portugal. So far, however, the latest developments have not had an impact on their respective bond yield gaps with Germany, which have remained relatively stable since June. The 10-year spread (1) with Germany is approximately 100 bps for Spain and 140 bps for Portugal.
The strong correlation observed between 2011 and 2013 was due to the systemic nature of market fears over the eurozone’s very survival. Such fears are not currently in play.
Portugal’s 2015 election saw the right-wing government replaced by a left-wing coalition including support from the radical parties. This pushed spreads wider as a result of investors fearing more expansionist policies and a reversal of previous reforms. Spreads rapidly exceeded 300 bps to reach almost 400 bps by the start of 2017. Although the government rowed back on some austerity measures, it continued to lower the budget deficit and, as a result, the country was able to exit the excessive budget deficit procedure in the spring of 2017. Spreads then started on their downward path.
In Italy’s case, the government’s defiant attitude could become a lasting burden for its spread levels.
Spread (1): generally designates the gap or differential between two rates.
The opinion expressed above is dated October 11th 2018 and is liable to change.
This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS.