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Italy’s borrowing costs rise after Berlusconi case

Italy's borrowing costs rose on Tuesday in a bond auction which raised €4.5 billion ($5.9 billion). Traders said it indicated investor unease following former prime minister Silvio Berlusconi's conviction for sex with an underage prostitute and abuse of office.

Published: 25 June 2013 14:15 CEST

Italy's borrowing costs rise after Berlusconi case

File photo: Olivier Morin/AFP

The Italian Treasury raised 3.5 billion euros with zero coupon bonds (CTZs), set to mature in June 2015, at a rate of 2.403 percent, the highest rate since September 2012.

It also raised 510 million euros in inflation-indexed bonds to mature in 2018 at a rate of 2.91 percent, compared to 1.83 percent in April, and €490 million with the same type of bonds to expire in 2026, at a rate of 3.75 percent compared to 3.23 percent in February.

"Berlusconi's conviction adds another layer of political risk at a time when the Letta government is deeply divided over fiscal policy and Italy's economy remains mired in recession," commented Nicholas Spiro, managing director of Spiro Sovereign Strategy.

"Further pressure on Italy's bond market will inflame political tensions, with Berlusconi's People of Freedom (PLD) party heaping more pressure on Letta to take a tougher line with Germany and the European Central Bank," he added.

Berlusconi was sentenced to seven years in prison and banned for life from holding public office, and while the punishment is suspended until all appeals have been exhausted, analysts are concerned of the knock-on effect the ruling could have on Prime Minister Enrico Letta's coalition.

"While it's premature to talk about a renewed flare-up of the bond market crisis in the eurozone, funding pressures in Spain and Italy are resurfacing at a time when the two recession-scarred economies can ill-afford higher borrowing costs," Spiro said.

Italy, with the eurozone's third-biggest economy is struggling to pull itself out of a two-year recession and did worse than thought in the first quarter of this year, shrinking by 0.6 percent.

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How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year.

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’, Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn.

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment?

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024 about 1 percent below the estimated structural level.

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending?

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”. The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”.

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025.

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023.

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write.

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers.

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.”

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