(Bloomberg) -- Italy’s debts run the risk of becoming unmanageable, and a creeping rise in borrowing costs shows investors are getting nervous, according to Bloomberg Economics.Italy, the original epicenter of the coronavirus pandemic in Europe, has suffered serious economic damage from nearly two months of lockdown. The European Commission forecasts output will shrink 9.5% this year, while Bloomberg Economics expects a 13% contraction.
If there’s long-lasting damage, low growth combined with government spending could push the already mammoth debt well beyond 150% of gross domestic product. That would reinforce the view that Italy needs more fiscal help from the European Union or even raise the issue of restructuring.
“Italy’s dismal economic performance, which is set to get worse as the nation’s leaders struggle to deal with the fallout from the coronavirus, puts the country’s ability to service its debts in doubt,” said David Powell, senior euro-area economist at Bloomberg Economics.
The government has just passed a 55-billion euro ($60 billion) stimulus program to try to prop up the economy, which follows an earlier 25 billion-euro plan in March.
Though the European Central Bank has been buying bonds through its Pandemic Emergency Purchase Program to help reduce spreads, Italy’s 10-year sovereign yield has still slowly increased to about 1.8% from 0.9% in mid-February.
The ECB’s program “will only go so far,” said Powell. “EU leaders will have to decide if they want to underwrite a bailout or let Italy go bust.”
If they go for the latter, debt restructuring “may be inevitable for Italy,” he said.
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