Ital­ian bor­row­ing costs back to pre-virus lev­els af­ter EU res­cue

The Daily Telegraph - Business - - Business - By Rus­sell Lynch

ITALY emerged as the big­gest ben­e­fi­ciary of the Euro­pean Union’s deal to cre­ate a €750bn (£680bn) Covid-19 res­cue fund as its bor­row­ing costs sank to pre-pan­demic lev­els.

The agree­ment, struck by Euro­pean lead­ers af­ter five-day talks, will see €390bn in grants – less than the tar­geted €500bn – and €360bn of cheap loans to sup­port the EU’s strug­glers.

Ne­go­ti­a­tions stretched re­la­tions among the 27-mem­ber bloc al­most to break­ing point as Mark Rutte, the Dutch prime min­is­ter, proved the big­gest road­block to a deal.

Guiseppe Conte, his Ital­ian coun­ter­part, warned that a fail­ure to agree a col­lec­tive re­sponse threat­ened the very ex­is­tence of the EU.

Italy has been among the hard­est-hit coun­tries, with more than 35,000 deaths due to its older and more dense pop­u­la­tion. Ma­jor lock­downs in the in­dus­trial north trig­gered an eco­nomic con­trac­tion of more than 5pc in the first quar­ter, with the Bank of Italy fore­cast­ing a 9.5pc slump for 2020.

But its cost of bor­row­ing for 10 years fell to 1.063pc at one stage fol­low­ing the deal, the low­est since the first week of March, as more up­beat Euro­pean in­vestors switched out of safer sov­er­eign debt from France and Ger­many.

Brent crude also hit a four-month high and shares rose on cheer over the agree­ment.

The res­cue deal will see the Euro­pean Commission bor­row the funds in fi­nan­cial mar­kets and pay it back over the next 38 years through EU bud­gets.

This falls short of the orig­i­nal pro­pos­als, pushed by Italy, for fully mu­tu­alised EU debt known as “coro­n­abonds”. Ex­perts said joint-bor­row­ing marked a de­par­ture for the EU af­ter years of cau­tion from mem­bers such as Ger­many.

Christoph Weil, economist at Com­merzbank, said: “For the first time in its his­tory, the EU is al­lowed to run up its own debts on a larger scale. This is the first de­ci­sive step to­wards the mu­tu­al­i­sa­tion of debt. In fu­ture crises, the hur­dle for the EU to take on fur­ther debt will be much lower.

“The EU is mov­ing fur­ther in the di­rec­tion of a trans­fer union. Whether all EU states are pre­pared to go down this path is doubt­ful, in view of the re­sis­tance of the ‘North’.”

Euro­pean lead­ers hope the funds will help sup­port the re­cov­ery of an eco­nomic bloc fac­ing an 8.7pc hit to growth this year, ac­cord­ing to Commission fore­casts.

But Hol­ger Sch­mied­ing, chief economist at Beren­berg, said: “The EU can use dis­burse­ments from the re­cov­ery fund as a car­rot to goad Italy and other coun­tries to­wards growth re­forms.”

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