Rome

Narrowing spread continues to delight investors

Slips below 240, spurred by robust German economic sentiment

Narrowing spread continues to delight investors

(By Christopher Livesay) Rome, August 13 - Italian bond yields continued to slip lower Tuesday while the spread between Italy's 10-year paper and its safe German counterpart narrowed to its lowest point in two years. After narrowing to a two-year low Monday of 245.5 basis points, the spread continued to charm investors Tuesday, slipping below the 240 mark, at 237.9 points in late trading. The yield, an equally important indicator of investor confidence in Italy's ability to pay off its debt and emerge from economic crisis, was down to 4.15%. The positive trend was spurred by the ZEW German economic sentiment indicator, which hit its highest level since March. So narrow a spread has not been seen since 2011, well before seismic political disruptions ranging from a flawed national election to struggles to form a coalition government rocked Italy and upset its troubled economy. Indeed, the spread widened to more than 500 points in November 2011 when then-premier Silvio Berlusconi was forced from office amid fears of a Greece-like financial collapse. Since then, the Italian political landscape has seen enormous changes while its economy continued to weaken with the worst recession in at least 20 years which also caused a jump in unemployment. But it appears that investors are beginning to believe politicians' claims that a recovery is in sight. Last week, Economy Minister Fabrizio Saccomanni predicted that the Italian economy will begin to show signs of recovery in the second half of this year. He spoke after national statistics agency Istat reported that Italy's gross domestic product (GDP) shrank by 0.2% in the second quarter, less than what analysts were forecasting and considerably less than the 0.6% loss reported in the first three months of year. The fact that the economy outperformed expectations is a significant sign, Saccomanni said. "I think if we can have a positive sign in the fourth quarter, it will make it easier to manage the economy and public finance". To stimulate growth, the coalition government of Premier Enrico Letta has been attempting a number of measures including paying billions of longstanding bills owed to private companies. The initiative that began under former caretaker premier Mario Monti envisioned 40 billion euros in debt payments owed to private enterprise, as a way of injecting much-needed cash into the moribund economy. That likely contributed to the rise of Italy's public debt, which the Bank of Italy says reached a new record in June. Italy's public debt reached 2.0751 trillion euros, up 0.6 billion euros from May, the central bank said Monday. Surprisingly, it also noted that despite the deep recession, tax revenues in Italy rose by just over 5% in the first six months of this year - including a jump of about 21.5% in June alone. From January to June 2013, the government's revenues from taxes totalled 189.436 billion euros, an increase from 180.159 billion during the same period in 2012. And in June 2013, revenues rose to 46.3 billion euros from the 38.1 billion euros reported in June 2012 - an increase of 8.2 billion euros, or about 21.5% the central bank reported.

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