Monetary Magic

Published 07/01/2020, 09:53

Italy’s debt-to-GDP ratio of almost 135% is among the highest in the world. Yet its borrowing costs have come down to their lowest level since 1980. Obviously, bond yields in general have come down significantly over the last 40 years as demographics and productivity growth have shifted. But the continuous drop in interest expenses over the last seven years or so have to be attributed to the European Central Bank, which has aggressively bought up Eurozone government bonds. Interest expenses as a percentage of GDP are down to 3.2%, from 5% in 2013. It would require a significant rise in either GDP growth or inflation to get the debt-to-GDP ratio down to a level that is able to cope with higher interest rates. Fortunately, a significant rise in rates isn’t all that likely in the short term.

Italy - Net Interest Payments As % Of GDP

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