Italy hikes 2023 debt issuance as public finances creak

Italy, the only major euro zone country to do so, has increased its estimate for debt issuance this year due to worsening state finances and delays in transfers from the European Union (EU). Italy’s borrowing costs are steadily increasing, causing concern among investors about its weakening economy and fiscal slippage. The Treasury raised its estimate for gross debt issuance this year to 333 billion euros, compared to its forecast of 310-320 billion euros made at the start of the year. This will push up Italy’s public debt, which already ranks as the second highest in the euro zone as a proportion of gross domestic product (GDP) after Greece’s.

In contrast, other European countries have taken different approaches this year. Germany reduced its needs in the fourth quarter by 31 billion euros, while Portugal and the EU also made similar adjustments. France increased its bond issuance for next year due to an increase in debt redemptions but left its plan for this year unchanged. Italy’s forecasts approved by the government indicate that the debt-to-GDP ratio will remain stable at around 140% from 2023-2026, rather than declining towards 60% as required under EU budget rules.

The Italian government’s funding needs are further complicated by its difficulties in meeting policy conditions set by the European Commission to receive billions of euros of post-pandemic Recovery Funds. A delay in receiving the second tranche of these funds could lead to an increase in Treasury bill or bond issuance this year to cover the temporary funding shortfall. The Treasury estimates that it has covered around 80% of its 2023 gross funding needs, lower than the previous estimate of around 90% by analysts.

Italy’s borrowing costs are rising, as indicated by the increasing gap between Italian and German 10-year yields. At an auction in September, 10-year BTP yields reached their highest level in 11 years. As of the end of August, Italy’s average cost of funding stood at 3.62%, the highest level since 2008 and up from 1.71% in 2022. Prime Minister Giorgia Meloni expressed that she is not worried about the recent rise in Italian bond yields.

For the fourth quarter, the Treasury estimates gross issuance of medium and long-term bonds at around 60 billion euros, with net issuance of around negative 12 billion euros over the same period. These developments highlight the financial challenges Italy is currently facing and the need to address its worsening state finances and delays in EU funds transfers.