Higher rates may force Italian debt spiral, says S&P

ITALY’S interest bill risks hitting levels last seen during the depths of the eurozone crisis amid fears the country could be sucked into a debt spiral.

Credit ratings giant S&P has warned that Italy is the most vulnerable developed country to bond market turmoil as its interest costs on markets surge.

S&P analysis found that Italy’s total interest bill would jump to 5.5pc of GDP if borrowing costs rose sharply by three percentage points, ramping up the risk of its huge debt pile spiralling out of control. It would be equivalent to a near €100bn (£86bn) interest bill and the highest amount since 2012.

Even a more likely one percentage point interest rate jump would lead to a debt servicing bill at 4.5pc of GDP.

There are fears that the current jump in interest rates threatens to make Italy’s huge debt pile unsustainable, risking another eurozone crisis. Italy’s debt has hit 150pc of GDP following the pandemic, the third highest in the developed world after Japan and Greece. Jack Allen-reynolds, Europe economist at Capital Economics, said that “potentially higher interest rates are a big risk for Italy” as its economic prospects are “poor” after two decades of low growth.

“Investors see buying Italian debt as a bigger risk and what that means is that drives interest rates up,” he said.

“The risk is this becoming a selffulfilling cycle of investors becoming worried, that driving interest rates up and that making the debt outlook even worse and pushing interest rates up even further.”

The ECB announced after an emergency meeting last week that it was drawing up a new tool to stop Italian interest costs surging ahead of other eurozone countries’.

Mr Allen-reynolds said the ECB has “learned the lessons from the debt crisis” as it prepares to intervene in bond markets again.

Italy’s 10-year bond yield has already soared from below 1.5pc in early 2022 to 4pc this month before the ECB’S promise of intervention calmed investor nerves. The gap between Italian and German bond yields – a key risk gauge watched by investors – has doubled in the last 12 months.