Italy Wakes Up to Bond Spreads Again in Throwback to Crisis Days

(Bloomberg) -- “Lo spread” entered Italian vernacular in 2011, when the country was struggling to survive the European debt crisis. Seven years later, financial tensions are rising again and the gap between Italy’s 10-year bond yields and Germany’s is back in the spotlight.

The country’s biggest newspapers are running front-page stories about the bond spread as investors balk at the budget targets unveiled by the populist government last week and the consequences start to hit home. The extra yield on Italy’s 10-year debt touched 308 basis points Wednesday, close to the highest since 2013.

That year began with five euro nations in bailout programs, Italy under technocratic rule and investors wondering what the European Central Bank would do to hold the currency union together. Since then, the ECB has pumped some 2.6 trillion euros ($3 trillion) into European bond markets but Italy’s public finances are under scrutiny again. In piazzas up and down the country, regular folk are starting to notice.

"There’s something going wrong,” said Rosa, a 56-year-old clerk at a children’s clothing shop in downtown Milan. “This is an indication of how the economy works."

Italy Wakes Up to Bond Spreads Again in Throwback to Crisis Days

The coalition’s plans to increase the budget deficit next year to fund tax cuts and raise benefit spending have sparked criticism from the European Commission that Italy is flaunting EU rules. But the investors the government will need to finance that deficit are also concerned that the stability of the country’s finances could be eroded by yet another spending splurge.

In the political world, everyone is talking about the markets.

Finance Minister Giovanni Tria said Wednesday that the sell off is a concern and that the jump in yields isn’t justified by the state of Italy’s economy. Deputy Prime Minister Matteo Salvini said he was "absolutely sure" the spread wouldn’t reach 400 basis points. His fellow deputy premier, Luigi Di Maio, said the Italian establishment is rooting for yields to climb further to undermine support for the populist coalition.

Salvini, head of the anti-immigrant League, smells a conspiracy. The market slump is “a financial maneuver by speculators, just like 25 years ago with George Soros, to buy Italian companies on the cheap,” he said.

Soros bet against the Italian lira in 1992 as part of his famous Black Monday trade against the pound. The Italian currency slumped more than 20 percent, forcing the government to hike taxes, an episode about which many older Italians remain sore.

So far, public opinion in Italy is firmly behind the government, with its approval ratings climbing in line with the country’s borrowing costs.

Italy Wakes Up to Bond Spreads Again in Throwback to Crisis Days

Rosanna Inghingolo, who works at a clothing retailer at Milan’s main railway station, said the government is right to ignore the market concerns and focus on issues such as creating jobs and reducing bureaucracy.

“For the first time in years I see optimism about the future, so who cares about the spread," she said. "I’m sure the economy will rebound. You need time. The spread will realize that in the end.”

For some Italians, the market is simply waking up to the problems they’ve shouldered through years of crisis and the lackluster recovery that followed.

“Most Italians don’t have time to get informed about the spread,” said Lorenzo, a 54-year-old employee at a mobile phone store in the city. "They have to worry about making ends meet."

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