Keeping up with the war of words over Italy’s planned budget deficit is a tough act.
But with European Commission president Jean-Claude Juncker saying “we have to do everything to avoid a new Greece — this time an Italy — crisis” and Five Star leader Luigi Di Maio using words like “terrorism” to describe Europe’s reaction, while suggesting Italy would seek “damages” for the widening in its spread over Bunds, it’s clear this problem will rumble on.
One thing on which nobody could disagree with Di Maio is that Italy’s borrowing costs have shot up — its 10 year yield was at 3.43% at press time, its highest level since early 2014.
Its spread situation is even worse, with Bunds rallying on every bit of bad political blood spurting from the situation.
But while Spain and Portugal’s spreads are also widening thanks to the German rally, their yields have been broadly steady since the Italian government announced, late last week, that its budget deficit target for next year would be 2.4%, rather than the more conservative 1.9% figure that investors — and some in the Italian government — had hoped for.
Why so, when at the height of the eurozone debt crisis in the earlier part of this decade, such problems in one eurozone periphery country would have dragged the bond prices of its peer group down with it?
It’s not only because of the economic recovery in those countries, though it helps. The creation of the European Stability Mechanism, the force of the European Central bank’s quantitative easing programme, and more besides have pushed the eurozone into becoming a more cohesive unit, raising a levee against any floods that might threaten to spill from one country to another.
Of course, were Italy to leave the eurozone — which some in its government have alluded to when they have felt most at odds with Brussels — that protection would be tested like never before.
But that would be an existential threat. For idiosyncratic issues, the eurozone defence line is holding firm, and investors are viewing countries on their individual merits and deficiencies.
None of that is to say that there is not more work to be done. There always is.
“Italy is Italy” is a popular phrase in the markets whenever the latest political turmoil from the country appears. What is becoming increasingly clear, is that thanks to the efforts of the last few years, the periphery is no longer the periphery.