Btp

Why the BTP-Bund spread should be negative

The “New CISS” (Composite Indicator of Systemic Stress in the Financial System) is the new indicator of financial stress, calculated by the ECB, of a country or geographical area (Eurozone).
In the past, the absolute maximum value for Italy was reached in 1992 with the speculative attack on the lira and Amato's famous overnight asset and at the time the BTP-Bund spread reached 700 bp.
Other top levels were reached in 2008 with the subprime crisis, in 2011 with the PIIGS crisis (spread at 570 bp), in 2020 with Covid and in 2022 with war and inflation.
If you take the spread of the New CISS "Italy-Eurozone" another very interesting graph returns: the tops were always reached during the 1992 crisis while, in all the other crises/recessions, Italy has had better stability (resilience ) at the level of systemic financial stress compared to the European average.
The last significant value was in 2013, in the aftermath of the PIIGS crisis and the summer intervention of Mario Draghi as President of the ECB, in turn following the first downgrading of the rating on Italian debt which fell to BBB+ on 13 January 2012 by part of S&P (the Monti cure did not solve as much as Mario Draghi's intervention).
In the period of maximum financial stress, when Italy had the lira and control of currency and interest rates, the rating on the sovereign debt was still "A".
The trends of Italy, the Eurozone and Germany of the NewCISS, placed on the same graph, highlight the Italian weakness of the 90s and in 2013 and some phases of greater solidity (2000s, 2016, 2023), even if the watershed of 2012, with the beginning of the decline of the sovereign debt rating, it never found a rebound in the ratings of the various agencies.
If the "New CISS" spread between Italy and Germany were taken into consideration, the situation would be similar, with an even negative spread.
Obviously there were important historical passages such as the collapse of the Berlin Wall and entry into the euro.
In the case of the Italian rating, on 13 January 2012 SP500 brought the rating on Italian debt to BBB+, abandoning the "A".
The absolute maximum value was 0.68 in 1995 which we could compare to 650 bp of BTP/Bund spread.
Values in the area or above 0.15 were recorded in the post-European sovereign debt crisis and with Conte 1, while with Covid the values were lower and during the 2022 crisis the spread even became negative.
We are improving the solvency situation compared to Germany, but the Government should not sleep soundly: without growth we are going nowhere and we risk not respecting the Stability Pact.

Author: A.W.M.

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