More than a year has passed since, in June 2011, the spread of rumors about the decision of the European Union to involve private creditors in the resolution of the Greek crisis gave rise to the rises in the spreads against the Bund of the yields of the benchmark bonds some countries, including Italy. For over a year, the comparison with the daily value of the BTP "spread" has been the focus of attention that goes beyond markets and institutions. The spread has entered the media debate, social confrontation, national costume. The economic and financial foundation of this attention is solid. Measuring the spread is a way to remind us of the constraint imposed on us by being holders of public debt which is among the highest in the world. A debt whose interest will amount to around 85 billion euros this year, equal to more than five percentage points of gross domestic product.
The spread is important, but that's not all. And it cannot, above all, exhaust in itself the scope of the analyzes on the state of health and on the prospects surrounding the Italian economy. It would be as if to judge a person's health we only looked at the level of cholesterol in his blood. Above two hundred, or something more, alarm. Yes, it is. But we also need to go further, in analysis and treatment. It is not only the Btp-Bund spread that determines the sustainability of the public debt, i.e. the possibility of initiating in the near future those reductions in the ratio between public debt and GDP which the Maastricht rules already required of us and which today impose the new metrics of 'Euro plus and the Fiscal Compact.
The arithmetic of sustainability is based on a ratio where the public debt is the numerator and the product of the Italian economy is the denominator. In dynamic terms, sustainability depends on the variation in debt – determined, other elements being equal, by the extent of interest – and on the variation in product and, therefore, on growth. A step towards unsustainability is taken whenever the interest payable on public debt exceeds the nominal measure of growth. It is what the technicians call the "snow-ball effect", as if to evoke the risk of a vicious circle between an increase in the debt burden and a reduction in growth.
A historical survey shows that in the years between 1996 and 2011 the difference between the growth rate of the economy and the cost of public debt was negative on average both in Italy and in Germany. Contrary to what one might commonly believe, on average over the last fifteen years the negative spread of nominal growth over the cost of debt was greater in Germany than in Italy. It is only in recent years that the situation has reversed. To contain the centrifugal forces of the "snow-ball effect" both in Italy and in Germany, fiscal policies have worked towards generating primary surpluses, i.e. positive balances between income and expenditure net of interest expenses. As a proportion of their respective GDPs, the primary surpluses generated by Italy in the 1996-2011 average and also in the average of the last four years turned out to be higher than those of Germany.
The spread is a symptom. In the broader framework of the arithmetic of sustainability, the risk represented by the increase in the Btp-Bund differential is that the tensions in the spread signal a generalized increase in all interest rates, those on public securities and others. Sensitivity exercises say that a permanent and immediate increase of three hundred cents of the entire yield curve of Italian securities would lead over the years to an increase in the average cost of our public debt from 4,3% estimated for 2012 to a 6,3% conceivable for 2015. A delta of two percentage points is no small amount on a public debt stock that travels just under two trillion euros. We are talking about interest rate increases for several tens of billions of euros. But a permanent and immediate increase of 300 cents in Italian rates represents an extreme scenario, of limited probability. And, looking back, it can still be observed that average costs of the public debt exceeding ten per cent were already borne by Italy in the mid-XNUMXs.
Put in a broader and more articulated framework, the question of the spread appears more complex, but less dramatic. The fundamental objective established by the renewed European rules is that of achieving the sustainability of the public debt and, therefore, combining rigor with the return of growth. It happened in Italy in the central part of the nineties. It can happen again today. In this reference framework, the governance of the spread represents an accessory target, equally achievable in the medium term. In the short term, stabilizing the yield gap between BTPs and Bunds will remain difficult, at least as long as transactions on those securities remain relatively small and highly speculative. In May 2012, the daily trading of BTPs on the MTS market stopped at just over 800 million euros compared to over two billion a year earlier and to the almost 1,1 trillion euros of long-term treasury bonds currently in circulation.
Not just spreads. To get out of the crisis, there is a need for reliable compasses that adequately account for the greater or lesser progress that everyone is making on the European path towards sustainability. The spread is an imperfect compass, which must be read by looking inside and going beyond. The persistent gap between the BTP and the Bund does not account for much progress made by countries such as Italy. Seen from the other side, the spread certifies the existence of a significant European subsidy for the repayment of the excess public debt which also exists in Germany. It is up to the market, the "policy makers" and the media debate to overcome the alarmism to understand and explain the complexity.
