Get set for the next euro crisis

Italy suspended mortgage payments for households and small firms as the country entered a coronavirus lockdown this week. Meanwhile, on Monday the spread between Italian and German ten-year debt (the gap between the yields on each) went above 2% for the first time since mid-2019. 

That suggests that the current sovereign bond rally is not completely indiscriminate, with investors reassessing the risks of lending to Europe’s second most-indebted nation. The Italian economy now looks set to contract sharply in the first and second quarter. 

In the world of sovereign debt risk, Italy is “the elephant in the room”, says Hung Tran in the Financial Times. The country is almost certainly heading for its fourth recession since the global financial crisis. 

That will push government debt above $2.5trn, equivalent to an utterly unsustainable 135% of GDP. An outright crisis is unlikely so long as interest rates remain low. But the risk is “rising” and it represents an “existential threat to the eurozone”.  

Europe’s leaders have yet to get a grip, says Peter Goodman in The New York Times. With recession looming, French and Italian politicians this week called for a coordinated fiscal response to Covid-19, but debt-averse northern governments will be hesitant to get on board. 

History suggests it takes a real crisis to get consensus in Europe. With Italy locked down that day may not be far away.