EXCLUSIVE: Italian Debt Issuance Head: If Growth Returns, ECB Support Withdrawal Not a Problem
27 May 2021
By David Barwick – Frankfurt (Econostream) – A withdrawal of the European Central Bank’s monetary policy support would not be a problem for Italy’s sovereign borrowing once economic growth returns and potential growth is boosted, according to Davide Iacovoni, director general of the directorate of the Italian Treasury responsible for public debt.
In an interview with Econostream last week, Iacovoni observed that everyone investing in Italy understands that the average cost of Italy’s debt, which was just under 2.4% last year and should hit 2.2% this year, will continue to decline. Renewed economic growth should lead Italy’s currently high debt-to-GDP ratio to peak and then also start descending, he said.
With an estimated 30% of Italian government bonds expected to be held by the end of this year by the Eurosystem and thus not in the market, Italian debt sustainability can look forward to a positive trend, he said.
However, there is ‘an element that is crucial, which is that we need to have a sustained recovery over the years, not just a technical rebound this year because of the dramatic loss of growth last year’, he said. ‘We need much more than that. Both in terms of magnitude and in terms of length in time. This recovery has to last for years, that will be crucial.’
In this regard, the potential growth-boosting impact of the European recovery fund is ‘fundamental’, he said, but at the same time, Italy needs to implement agreed reforms to facilitate that impact.
‘The outcome has to be having higher growth not just next year or the next couple of years, but on average structurally higher growth that will be crucial to declining debt-to-GDP over the next decade at least’, he said.
If everything falls into place properly, Iacovoni would react calmly to a withdrawal of ECB support, he confirmed.
‘[I]f growth is there, and we have higher rates because of growth, then it’s good, it’s economically sound’, he said. ‘What we can expect however is that if Italy is able to reach higher potential growth, definitely this will bode well for debt sustainability. And this will be priced in by market participants in terms of tightening the spread that we currently have with the core countries of the euro area.’
‘So in the end probably we can have rates that will grow over time only moderately, and this will be crucial also for our debt sustainability’, he added. ‘So definitely the fact that the ECB will change its monetary policy in the medium term is not an issue if all things are working in the right direction.’
Iacovoni indicated that he saw little likelihood of a major change in ECB policy soon, given the transient nature of the factors behind recently higher inflation. ‘Even the ECB’s economists are pointing to the temporary nature of this recent inflation evolution’, he said.