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Italy has decided to increase its debt issuance estimate for 2023. Citing deteriorating state finances and delays in European Union fund transfers. This move sets Italy apart as the only major euro zone country to take such action.
The upward revision has been prompted by Rome’s growing borrowing costs. Which are attracting more scrutiny from investors concerned about the country’s weakening economy and fiscal slippage.
Revised Debt Estimate
Late on Friday, the Italian Treasury released its issuance program for the fourth quarter, revealing an updated estimate for gross debt issuance this year: a staggering 333 billion euros ($351.95 billion). This figure is a significant increase compared to the initial forecast of 310-320 billion euros made earlier in the year.
With this adjustment, Italy’s already substantial public debt, totaling 2.85 trillion euros, will rise further. It currently ranks as the second-highest in the euro zone, relative to gross domestic product (GDP), surpassed only by Greece.
Differing Approaches in Europe
Unlike Italy, other European countries have taken different approaches this year. Germany, for instance, reduced its fourth-quarter borrowing needs by 31 billion euros ($32.59 billion), while Portugal and the European Union followed suit with similar measures. France, on the other hand, raised its bond issuance for the next year, driven by an increase in debt redemptions, but left its plan for this year unchanged.
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Debt-to-GDP Ratio Challenges
The government’s approved forecasts suggest that Italy’s debt-to-GDP ratio will remain stable at approximately 140% from 2023 to 2026. This is a far cry from the pre-pandemic European Union budget rules, which required a decline toward 60%. These rules were suspended in 2020 due to the COVID-19 pandemic.
Delayed EU Funds Complicate Matters
Italy’s funding requirements are further complicated by its struggles to meet the policy conditions set by the European Commission in exchange for post-pandemic Recovery Funds. JP Morgan analysts predict that delays in receiving a second tranche of these funds will necessitate increased Treasury bill or bond issuance this year to cover the temporary funding gap.
As of Friday, the Treasury estimated that it had covered about 80% of its 2023 gross funding needs, contrary to earlier estimates of around 90% by analysts.
Rising Borrowing Costs
Meanwhile, Italy’s borrowing costs are on the rise. The spread between Italian and German 10-year yields, a measure of market sentiment toward Italy’s high debt levels, reached 200 basis points in early London trading on Friday, the highest level since March. Furthermore, 10-year BTP yields hit their highest level in 11 years during Italian auctions on Thursday.
At the end of August, Italy’s average cost of funding reached 3.62%, the highest level since 2008, up significantly from 1.71% in 2022, according to the Treasury.
Prime Minister’s Perspective
Despite these challenges, Prime Minister Giorgia Meloni expressed confidence on Friday, stating that she was not worried about the recent increase in Italian bond yields.
For the fourth quarter, the Treasury anticipates gross issuance of medium and long-term bonds to be around 60 billion euros, with issuance net of redemptions expected to be negative at 12 billion euros over the same period.
Disclaimer: Please note that this article serves solely for informational purposes. Thus, must not construe as financial advice. We advise readers to conduct thorough research and consult with financial professionals before making any investment decisions.
