At first glance, Turkey’s home-grown crisis has little to do with Italy. Even so, the collapse of the lira of all things has also afflicted Italian government bonds. BTP-Bund spreads widened since mid-July, reflecting concerns that Italy will raise new borrowing and the dispute with the EU Commission could possibly escalate. The latest increase in the risk premiums is due primarily to the intensified crisis in Turkey. Italian government bond prices recovered this morning for the first time in days. The Turkish lira also posted slight profits.
Even though the Lega’s economic pioneer, Borghi, stated in press reports that he found any spillover from the Turkish crisis towards Italy illogical, two main reasons are probably behind the development. On the one hand, concerns are growing that a wave of bankruptcies in Turkey could also impair European banks. Italian banks are the most exposed to Turkey, after their Spanish and French counterparts. According to the Bank for International Settlement (BIS), Italian banks’ receivables in Turkey amount to around USD 18.5bn, nearly 1% of Italian GDP. The volume of receivables is therefore not particularly high, but Italian banks are still dealing with the fallout of the political uncertainty and moderate economic situation in their own country. On the other hand, investors are emphasising political risks in general more strongly and are concerned that flawed economic decisions in Rome could also endanger the country.
Although the Italian government is taking notice of the market reaction, individual cabinet members are drawing very different conclusions. While prime minister Conte stated today that Italy has to reduce its total public debt, Borghi called for the ECB to shield EMU government bonds from speculation. Furthermore, head of the budget committee in the Italian lower house called for a 150 basis point limit on the spread of EMU government bonds over the bonds of other member states.
Although the Turkey crisis is currently dominating the headlines, investors are beginning to experience increasing nervousness as to which powers in Rome can assert themselves in the budget negotiations in September. While prime minister Conte and finance minister Tria enjoy a certain degree of confidence on the market, concerns are all the greater about the hard-liners from the ranks of Lega and the 5-Star Movement. If the moderates prevail and only smaller portions of the government plan are implemented, there is a possibility that the market will settle down. However, if the more radical camp of Salvini, Di Maio, Borghi and Minister of European Affairs Savona keep the upper hand, the uncertainty could exceed the level in the spring and spread to the rest of the Eurozone