INVESTORS SHOULD CALL ITALY´S BLUFF / THE WALL STREET JOURNAL

Investors Should Call Italy’s Bluff

As long as most Italians support the euro, market turmoil in Italy looks likely to pass

By Jon Sindreu




Italy’s antiestablishment government is now on a collision course with the European Union. Investors should probably call its bluff and buy Italian assets.

On Friday, Italian 10-year government bond yields rose to 3.2% and spreads over German yields widened sharply. Shares in Italian banks led losses across Europe: UniCredit, the country’s biggest bank, was down almost 8%. This was after Italian officials agreed late Thursday to triple the estimated budget deficit for next year to 2.4% of gross domestic product, defying EU demands to rein in spending.

But investors should focus less on Italy’s budget deficits and more on its voters’ support for the euro.

The eurozone is an anomaly among sovereign borrowers. While each nation still issues its own debt, all 19 of them share the European Central Bank. Between 2010 and 2012, fears that Italy, Spain or Portugal would be kicked out of the bloc led spreads on their debt to balloon. They narrowed again when ECB President Mario Draghi promised to do “whatever it takes” to save the euro. 

The lesson here: Most of what those spreads are measuring isn’t the risk of default, as in the corporate-bond market, but the fear of a country leaving the eurozone, which would likely mean investors getting paid back in Italian lira or Spanish pesetas. This summer’s ructions in Italy reinforced the point. Italian spreads only jumped on the news that parties in the new government had drafted secret plans in which they considered exiting the euro.


Public debt in Portugal and Spain remains gigantic, and investors don’t seem to mind. They shouldn’t: As long as the eurozone doesn’t break up, sovereign debts will be paid back.

Investors who bet on this back in 2012, or after the Greek crisis in 2015, have amassed large gains. The eurozone as a whole is no different to the U.S. or the U.K., where governments can always print money to pay back creditors. 


Italian Interior Minister Matteo Salvini speaks during a press conference in Tunisia on Sept. 27. Photo: fethi belaid/Agence France-Presse/Getty Images


Of course, the Italian government might secretly want to be kicked out of the eurozone, and defying European officials could be the first step toward that goal. But a 2.4% deficit—still below the EU’s 3% rule—is unlikely to be the start of an all-out political war.

Moreover, about 59% of Italians support the common currency, eurozone official surveys show—the lowest in the bloc, but still a clear majority. Even the painful budget cuts that the EU imposed on Greece weren’t enough to energize support for ditching the euro there.

Until support for the euro crumbles, here’s a rule of thumb for longer-term investors: If any eurozone bonds yield much more than Germany’s, buy them.