Italy’s instability might harm US and worldwide markets.
The Greek debt crisis shook markets 10 years ago. Italy is the world’s third-largest government-bond market, 10 times larger than Greece.
Italy’s political dilemma is never convenient. This one is untimely. Italy’s public debt is 150 percent of its economy, a record.
“Russian gas exports, ECB policy hurt the economy.”
Its economy is being hit by the ECB’s decision to tighten monetary policy to combat inflation and by Russia weaponizing natural-gas exports in its war against Ukraine.
It is difficult to imagine how Italy’s sluggish and politically fragile economy could work out of debt.
The breakdown of Mario Draghi’s coalition government sparked Italy’s current crisis. This allows early parliamentary elections in September or October.
It also entails political uncertainty because it could lead to a neo-fascist government led by the Brothers of Italy party, which is anti-EU.
COVID harmed Italy’s economy and government finances. However, Italy has been kept afloat by the ECB’s Pandemic Emergency Purchase Program. The ECB bought all of Italy’s net debt between 2020 and 2021.
As it fights inflation, the ECB has stopped buying Italian bonds. So Thursday’s 50-basis-point ECB rate hike was the first in 11 years.
Italy’s recent political turmoil has caused a sell-off in government bonds. As a result, these bonds’ yields soared to over 4%, 2 points higher than German government-bond yields.
The ECB adopted a Transmission Protection Instrument Thursday to prevent another eurozone sovereign-debt crisis. The ECB can keep interest rates low by buying Italy’s bonds in bulk. In certain circumstances.