Warning signs are being voiced from analysts over Italian debt which currently stands at 151% of GDP (a considerable increase from the pre-pandemic level of 134%). The ECB has amassed much of their debt with Frankfurt purchasing €722bn of Italian public debt – the equivalent of around 40% of Italian GDP. Italy’s 10-year yields have now hit over 3.14% after rising close to 110bp in the last month or so – compared with Germany’s which have risen by 50bp. This means that the risk spread is now over 200bp demonstrating the increasing disparity across two major eurozone economies, another alarming sign for the single market which of course makes devising monetary policy all the more difficult.Fitch are predicting that Italy’s deficit will be 5.5% of GDP over the course of 2022 and 4.4% over 2023, therefore digging an ever-greater hole into Rome’s sovereign debt. This trend continues to concern investors and as such, foreign investors are increasingly withdrawing from the Italian debt scene. Indeed, in 2008 the share of Italian public debt held by foreign investors has fallen from around 45% in 20008 to around 27% by 2012 before again falling to under 25% today.
While rising inflation is helping to alleviate some of Italy’s debt issues, the prospect of a rate hike across the ECB (where many analysts predict could come before the end of July) will cause a considerable increase in the cost of servicing Italy’s debt. Moreover, poor growth forecasts from the IMF’s latest projections are also indicative of the problems predicted for Rome over the coming months and years. In fact, the IMF are now forecasting growth to stand at 2.3% for 2022 and 1.7% for 2023.
Russia’s “Victory Day”
In Russia, processions are under way for Victory Day – a public holiday celebrating the signing of the German Instrument of Surrender on 9th May 1945 – which has since become a day of military parades, speeches, and nationalistic chauvinism. Putin’s is expected to address crowds shortly and some commentators are concerned that he may use the occasion to mobilise further troops or redefine what he calls his “special military operation” as war.
Russia’s military parade this year is set to be around 1/3rd of the size of last year. This comes as conservative estimates of Russia’s military dead since they invaded Ukraine stand at 15,000. Russia spends around 4% of its GDP on miliary spending (some $62bn) with this expected to rise as their campaign continues to struggle. As the Private Eye noted, global annual military spending is around $2tn, while international military aid to Ukraine currently stands at around $7bn as the conflict is expected to result in a loss of $750bn to the world’s economy.
Over the weekend, Russian military aggression involved the shelling of a school in Luhansk, tragically killing 60 people. And as military materiel lines the street of Moscow, the UK has announced a fresh tranche of sanctions aimed at hitting some £1.7bn of trade between Britain, Belarus and Russia. This came after Canada and the US also announced a new set of sanctions as commitments to miliary support have also been voiced further.
The Week Ahead
This week will see a series of talks from members of the BoE’s MPC in addition to members of the FOMC and ECB, including Michael Saunders in the UK today and Christine Lagarde on Friday. On Wednesday, CPI figures come out of China and the US where the market is forecasting a print of 8.1% in America, down from last month’s print of 8.5%. On Thursday, all eyes will be on UK GDP for Q1 which is expected to come in at 1%. Recently, fears have been voiced over the health of the UK economy as organisations including the IMF and World Bank expecting the UK to have the second lowest level of growth amongst the G20 for 2023, behind Russia. Of course, just last week the Bank’s Governor, Andrew Bailey stated that the economy would likely begin to contract in Q4 2022 while forecasting that GDP will be fall 0.25% over 2023.
Have a great day.