Skip to main content
Welcome to
super saver spring
offer ends april 20
save over $140
Sale ends in
$0.99
per week for 24 weeks
Welcome to
super saver spring
$0.99
per week for 24 weeks
save over $140
// //

Market gauges measuring euro break-up risk emanating from Italy are starting to flicker, flagging the risk that another existential crisis may be building for the euro zone.

Hit hard by the coronavirus pandemic, Italy faces recession and massive debt increases. It’s also been left disillusioned with the response from wealthier northern European states to calls for help.

On Thursday, EU leaders agreed a trillion-euro emergency fund to finance recovery from the pandemic but provided few details. That came after several refused to countenance issuing joint debt, which Italy has called for and a step that could reassure investors about its creditworthiness.

Story continues below advertisement

So with mainly the European Central Bank standing between Italy and spiraling borrowing costs, and some Italian politicians stoking opposition to the country’s euro membership, the ‘Quitaly’ gauges are back on the radar.

INSURANCE?

ECB asset buying might limit the rise in Italy’s borrowing costs but it hasn’t eased concerns about its creditworthiness.

The cost of insuring Italian sovereign debt against default is almost back at levels seen in March before the ECB stepped in with emergency measures to halt a financial rout that was fueling fears about the currency bloc’s cohesion.

Richard McGuire, Rabobank’s head of rates strategy, pointed to the widening gap between Italian five-year bond yields and credit-default swaps, as a sign the market is not fully reassured.

This gap rose to around 260 basis points this week, the highest since 2018 when Rome was locking horns over its budget plans with Brussels.

McGuire said that reflected the pricing of some “fragmentation risk.”

Story continues below advertisement

“As bold as the ECB action has been to help countries maintain access to financial markets, it does not address concern about solvency coming from the fiscal burden created by the coronavirus crisis,” he added.

EURO WATCHING

The euro fell in the past week to a one-month low against the dollar, having shed 6% since early March. In this time, Italy’s 10-year yield premium over Germany has widened more than 50 basis points to 230 bps.

That inverse correlation between the euro and the spread is not normally observed but comes into play whenever Italy stresses are seen fueling a threat to the single currency. It’s been particularly noticeable since the start of April.

The 5-Star Movement, one of the parties in the ruling coalition in Rome, warned of government collapse if the bloc’s ESM bailout fund were tapped because conditions attached would compromise Italy’s sovereignty. The opposition League party went one step further, questioning whether Italy should stay in the EU at all.

BUY DOLLARS

Story continues below advertisement

If Italy’s place in the euro zone is at risk, its dollar bonds look a better investment than its euro debt.

If the debt ends up being restructured, bonds issued under New York law would offer better protection than those governed by Italian law. If Quitaly happens, the latter would be more vulnerable to redenomination into Italy’s new currency.

So, yields on Italy’s 15-year dollar bond are up around 25 bps year-to-date while yields on a similar-maturity euro issue are up 36 bps.

Italy’s dollar debt similarly outperformed during its 2018 squabble with the EU over spending policy.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies