Record Italian bond sale will cost taxpayers extra $1.6bn

Bloomberg

Italy’s record bond sale this week has cast a light on the price tag of the country’s political tension with the European Union (EU).
The government’s decision on financing its pandemic costs will saddle taxpayers with 1.6 billion euros ($1.8 billion) of interest expense over the five-year life of the security. That’s 1.5 billion euros more than if Rome had borrowed using an emergency credit line through the European Union.
But the EU’s bailout fund, the European Stability Mechanism (ESM), has become toxic in Italian politics as nationalist parties use it as a cudgel to portray institutions in Brussels as attempting to undercut national sovereignty.
Instead, Italy sold 22.3 billion euros of five-year “Covid-19 emergency” notes with a 1.4% coupon May 21. That means the government will be on the hook for as much as 312 million euros of interest each year.
The bonds are linked to inflation, meaning the interest cost could change over time.
The ESM facility, which became operational last week, allows Italy to borrow as much as 36 billion euros while only paying about 0.1% interest. So for the same amount of money, Rome would only have to pay 22.3 million euros in yearly interest, or 111 million euros over the life of the bond. Furthermore, the ESM would have lent the money to Italy at that rate for 10 years.
Populist parties in Italy have portrayed the ESM as a sellout to Europe, telling voters the country would lose control of its finances and future if it were to accept help from the fund. Finance Minister Roberto Gualtieri insists that these specific ESM funds would have almost no financial conditions, though they would have to
be used for health-related
purposes.
Prime Minister Giuseppe Conte sought to escape the bind by saying Italy wouldn’t use the ESM, citing EU plans for a separate recovery fund that would be able to disburse grants rather than loans.

Toxic politics may come with a $680mn price tag
Populism in Italy isn’t cheap, and it may cost the government in Rome about 626 million euros ($680 million) a year.
That’s the amount of money Italy would stand to save each year if it signs up for a new euro-area program, which will extend massive credit lines to struggling countries at near-zero interest rates.
But the Italian government hasn’t committed to signing up for a credit facility from the European Stability Mechanism, having initially said it wouldn’t tap the 36 billion euros it’s eligible for because of the stigma associated with the bailout fund.
The new program would have a maximum average maturity of 10 years for the loans, and would probably pay interest of around 0.1%, or 36 million euros annually, for the full allocation. If Italy instead went to the bond market to finance its recovery with 10-year debt it would confront borrowing costs of around 1.84%, meaning for the same amount of money, Rome would pay about 662 million euros in interest each year.
The ESM program hasn’t yet been finalised and all the details of the credit lines may not become clear until it’s in place, likely by May 15.
Despite reassurances from officials in Brussels that the loans wouldn’t have any conditions, Italian populists continue to say that the credit lines would undercut Italian sovereignty. That’s a problem for Prime Minister Giuseppe Conte, who’s facing calls to issue new Italian debt instead.