Italy's budget is likely to be a damp squib

in busy •  3 months ago

The new coalition govt in Italy is preparing it's first budget, which will get unveiled towards the end of September 2018, and the markets are worried.

I personally think the first budget will be low key - here's why:

The above graph shows the maturity profile of Italy's govt debt, and as you can see, most of it is very short term (in contrast to a country like the UK which prefers long term debt).

There are pros and cons with which type of bond maturity a govt prefers. If you think interest rates will continue to fall, it makes sense to have short-term bonds, and that way, when you reissue them, you can reissue them at a lower rate. On the other hand if you think interest rates will rise, it makes sense to borrow as much as you can at low rates for a very long term (which means the redemptions are way into the future and all you need to do is pay the low interest in the meanwhile).

From a risk management point of view, it also makes sense to have a smooth flattish maturity profile so you arn't hit by high redemptions in any one year.

One reason the UK bond markets were unphased by Brexit is because the govt had already ensured that most of it's debt had long maturities and there wasn't a lot of debt that needed refinancing. The fact that the budget deficit narrowed sharply this year was just a happy surprise on top.

Italy on the other hand hasn't managed it's profile too well. Because of the huge amount of debt that needs refinancing in 2019, they dare not upset the markets with a risky budget this year.

If I was Finance secretary Tria, I'd produce as boring a budget as possible, and focus on changing the maturity profile of my debt. When they roll over the 2019 maturities, they need to do it with longer maturity dates to give themselves a five year breathing room where they don't need to do any rollovers or new borrowing, and are thus given the space to take a few risks.

For that reason, I don't think we'll see a risky budget till 2020, after they've got over next year's debt maturity hump.

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