The ups and downs in the spread have rekindled the spotlight on Italy, but at the moment the Italy risk seems manageable. This is because the Belpaese is structurally more solid than in 2011. The spread, in any case, is not a fantasy of the newspapers, but a "tax on the Italian system", as the president of ABI Antonio Patuelli said.
But what numbers are we talking about? We have tried to quantify the impact of a 100 basis point increase in the Btp-Bund spread on various areas of our economy. Here are some numbers to keep in mind to get the pulse of the situation.
PUBLIC DEBT
When the spread grows, given by the difference between the yield of the ten-year BTP and the German Bund of the same duration, it almost always means that the yield of the BTP has risen. When the yields of the BTP increase, the new debt issues pay higher yields and for the State it means borrowing at a higher cost. According to data collected by Sole24Ore, the Parliamentary Budget Office estimates that a shock of 100 basis points (i.e. 1%) to Italian yields could cost around 4,5 billion euros more in 2019. Currently, the increase in yields he concentrated on the part of the curve between 3 and 7 years with an average shock of 108 basis points. If bond yields remain at these levels throughout the year, the cost of 4,5 billion could become reality.
BANKS, INSURANCE AND ASSET RATIOS
The increase in bond yields affects banks in at least two ways: a write-down of assets and a reduction in the Common Equity Tier 1 (CET 1) capital ratio. According to Equita Sim's calculations, an increase in the spread of 100 basis points leads to an overall loss in the portfolio of the top 10 Italian banks of approximately 3,48 billion euros in terms of the value of government bonds. The loss in value of the bonds negatively impacts CET 1 by 37 basis points.
A Credit Suisse study offers a few more details: an increase in the spread between BTPs and Bunds by 100 basis points would reduce CET 1 by 95 basis points on average.
In addition to the banks, there are insurance companies, which hold a large portion of our debt. According to a table published in Sole24Ore (Saturday 9 June), the main European insurance institutions estimate that an increase of 100 basis points in the spread between the BTP and the Bund could cost on average around 23 percentage points in terms of capital solidity (Regulatory Solvency Ratio) . Not really a health walk.
LOANS FOR BUSINESSES AND HOUSEHOLDS
When tension rises on the markets and banks' capital ratios worsen, it becomes more complicated to disburse credit to households and businesses. However, the reaction times of the decision-making processes that affect the disbursement of credit are much longer than those of the market. Also because, in addition to the cost of capital procurement, institutions take into account other factors, such as the international context, the current treasury situation and the competitive context.
Therefore it is early to understand if and how banks will pass on the increase in the cost of money to customers: at the moment the repercussions on the Euribor and Euris rates (which are the reference rates for variable and fixed rate mortgages) have been decidedly mild compared to the increase in rates on government bonds.
By way of example, I report an "old" estimate by Crif Decision Solutions: due to the increase in the spread in 2011, Italian companies experienced an increase in the cost of short-term debt of about 80 basis points, more or less 15 billion euros of additional financial charges.
As we said at the beginning, today Italy is not in the conditions of 2011. However we live in a complex and interconnected system: it cannot be thought that investors, savers, banks, businesses and households are subjects separated by watertight compartments. This is simply not the case: the various sectors influence each other, so it is far from unlikely that an increase in the spread will end up having repercussions, in one way or another, on businesses and households as well.
Source: AdviseOnly
