By: Dr. Mike Campbell
As we have pointed out before, the question of sovereign debt is a subjective thing. It is not the absolute level of debt that a country has that dictates the interest rates that they must offer to raise money through the bond market, but the market’s confidence that a country will be able to honour its obligations. This is why Japan and America enjoy substantially cheaper interest rates on their debt vehicles than, say, Greece, Ireland and Portugal.
Italy has the highest sovereign debt level of any European country and although its name has been linked alongside Spain and Belgium as a potential candidate for the next Eurozone sovereign debt crisis, it has been able to fund its debts at a reasonable price until recently.
Italy went to the markets to raise €3.5 billion through the issue of 3 year bonds this week. Such is the ebbing of confidence within the bond market that Italy has had to pay 4.8% to ensure the success of its latest issue. This is fully 1.1% more than it needed to pay as recently as June.