(Finance) – TheItaly will have to implement a credible fiscal consolidation plannot only because of the European Commission’s excessive deficit procedure, but also because of the increasing dependence on foreign investors to purchase sovereign bonds. Scope Ratings says so, also stating that efforts to increase the share of debt held by domestic retail investors are unlikely to be sufficient.
Without decisive measures to reduce persistent deficits, the nominal deficit of Italy’s general government is set to remain above 3% of GDP in the coming years, leading to an increase in the debt-to-GDP ratio. The rating agency expects that the debt will rise to 143% of GDP in 2029 from 137% in 2023.
Once approved by the Council of the EU, the government will have to undertake a medium-term fiscal consolidation to reduce public debt. Crucially, the necessary annual fiscal consolidation of around 0.6% of GDP appears achievable, at least until 2026, provided that Italy maintains a minimum level of public investment in line with the seven-year adjustment horizon envisaged by the recently adopted EU fiscal rules.
“However, if the targets agreed under the excessive deficit procedure are not met, Italian debt securities may not be eligible for the Transmission Protection Instrument (TPI) of the ECBdesigned to contain sharp increases in government bond yields – the analysis reads – This is all the more relevant as the central bank reduces its holdings of Italian and other euro area sovereign debt, increasing Italy’s vulnerability to changes in foreign investors’ risk appetite”.
From the start of QT in March 2023, the amount of debt securities held by Italian residents (excluding financial institutions) increased by €133 billion, reaching an all-time high of €353 billion in April 2024. This increased the share of government debt held by residents by 5 percentage points to 15%, offsetting the decline in debt held by the ECB of €42 billion and the €64 billion held by financial institutions. Over the same period, non-residents increased their holdings of Italian government debt by €85 billion, reaching 29% of outstanding debt, although this share remains well below the 50% share that preceded the 2012-2013 euro area crisis.
L’introduction of BTP ValueItalian government bonds sold exclusively to retail investors, helped achieve the government’s goal of increasing the share of Italian public debt held by residents. “However, strong retail demand is unlikely to be sufficient to replace the gradual decline in the ECB’s holdings of Italian government bonds in a context of still rising public debt,” Scope Ratings said. “Deposits held at Italian banks of €2.03bn in Q1 2024 are mainly overnight deposits, of which around 24% are with agreed maturities or redeemable at notice. This is below the previous highs of around 36% reached in 2012/2013. If depositors were to move their current savings held as overnight deposits into BTP Valore at a similar level to the highs of 36% of deposits with agreed maturities or redeemable at notice, they would absorb around €251bn of additional public debt. But this remains well below the central bank’s current holdings of around €674bn, so demand from foreign investors will remain crucial“.