Italy government

The Italian government borrows money for free

The most indebted EU economy after Greece published on Tuesday three year bond which bears no interest. Investors will not receive anything until the bond matures in 2024.

This is the latest sign that very little is preventing governments, backed by the firepower of their central banks, from to borrow whatever it takes to rebuild economies ravaged by the pandemic.

Authorities have already pumped trillions into their economies to cushion the impact of the crisis and face growing pressure to provide even more financial support to cash-strapped workers and businesses, especially as a second wave of coronavirus infections threatens to derail the fragile recovery.

Federal Reserve Chairman Jerome Powell said earlier this month that there was little risk of the government exaggerating the stimulus, while too little support would lead to a “weak recovery”.
Even the International Monetary Fund, known for take a hard line with governments running up unsustainable debt, warned against withdrawing aid too quickly. “Preventing further setbacks will require that policy support is not prematurely withdrawn,” chief economist Gita Gopinath said in a report released on Tuesday.

Italy also sold longer-term bonds at historically low yields, despite a downgrade by Fitch Ratings in April that put the country’s credit rating a notch above junk. The IMF expects Italy’s economy to contract by 10.6% this year and expects public debt to exceed 160% of GDP by the end of 2020, up from 135% last year.

Italy’s ability to take on debt so cheaply highlights unprecedented central bank intervention at created a disconnect between financial markets and the real economy.

“We are still in the midst of a global pandemic, [yet] Italy can finance itself for free,” said Rabobank head of rates strategy Richard McGuire. Investors expect even more support from the European Central Bank, he told CNN Business.

Bond investors are betting that the European Central Bank will reopen the stimulus taps, possibly as early as December, adding billions more to its $1.35 trillion asset purchase program.

Italy is also benefiting from European Union plans to transfer huge sums of money to the hardest hit states as part of a 750 billion euro ($882 billion) post-pandemic recovery fund. dollars).

The country is expected to receive some 86.6 billion euros ($101.7 billion) from the fund, according to Berenberg chief economist Holger Schmieding.

“With the prospect that money will eventually flow, even in the face of fiscal difficulties [EU] member states can now borrow at extremely favorable terms in the markets,” he said in a note to clients on Wednesday.