Italy’s 50-year bond madness

It's been a peculiar few days in the markets, says Ian King in The Times. There was the "flash crash" in the pound, for one thing. Even odder, however, was Italy's sale of its first 50-year bond. And "more astonishing" was the demand for it. It attracted €18.5bn of orders, far more than the government had expected. It was priced to yield 2.85% in other words, investors are happy to get that much per year for a bond that expires in 2067. Five years ago, at the peak of the euro crisis, Italy couldn't even persuade investors to accept that return on three-month paper.

This is nuts for so many reasons it's hard to know where to start. But "the Wikipedia list of Italian prime ministers" is probably as good a place as any, as DollarCollapse.com notes. "Spoiler alert: they've had a million of them." Well, not quite, but 63 governments since 1945 is not the sort of statistic that would seem to justify entrusting your money to a country for half a century at a piddling rate of return. It's always been a shaky polity; a collection of disparate and fractious states cobbled together in 1861.

Since the war, poor macroeconomic management by successive governments has racked up debt and increased inflation. The latter tended to be higher than the European average, and certainly higher than 2.85%, which hardly bodes well for real returns from this bond. Years of overspending have produced a public-debt pile worth 130% of GDP.

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Nor is there much reason to suppose things are about to take a miraculous turn for the better. The Italian economy has lagged the eurozone for years, and in recent months has slowed to a crawl again. One key problem is the banking system, suffering from bad debts worth around €360bn. Continual political stalemates in the two upper houses of parliament have thwarted structural reforms to galvanise growth in the over-regulated economy. An attempt to rectify this in December, through a referendum on measures to reduce the upper house's authority, could go badly wrong.

Prime Minister Matteo Renzi has staked his personal authority on it, and has said he will quit if he fails. That could lead to chaos, given the economic stagnation and pervasive anti-EU populism on the political scene. The polls suggest Renzi will lose. In a worst-case scenario, says King, the EU could tear itself apart in the next few years, and Italy could do the same.

Italy's bond, then, is a bet that all will be well, which is not a viewpoint that history would justify. It's just another example of "the desperation for anything that offers yield", says the FT's Miles Johnson. Steer clear.