European rates are on the cusp of rising, and large corners of the market are becoming increasingly worried that Europe’s southern sovereigns are going to have a problem with debt sustainability. History suggests this worry is misplaced.
Italy is the poster child of the eurozone's periphery sovereign borrowers. It has the fourth largest GDP in Europe and the most liquid bond curve by far of the southern European sovereign borrowers.
And yet, it comes up frequently when analysts work themselves up over debt sustainability.
This worry is misplaced; at least in the short to medium term.
For starters, Italy has a long history of bearing a high debt to GDP ratio. This is not a new situation for the country. This time around, Italy has the advantage of an average maturity on its debt of around seven years, giving it plenty of breathing space.
Analysts reckon that a 100bp increase in the yield curve will equate to €3bn of extra interest costs in the first year, rising to roughly €6bn extra in year two, neither of which are big enough to cause a debt crisis for Italy.
Another strong argument for Italy’s ability to service its debts is that the country is led by prime minister Mario Draghi. As the European Central Bank governor in the aftermath of the global financial crisis and during the subsequent sovereign debt crises, Draghi knows a thing or two about steering an economy through its debt repayments.
Finally, there is Draghi's old stomping ground, the ECB itself. Its various bond buying programmes may be coming to an end, with rates expected to rise in July, but the ECB has shown itself to be both willing and capable of quickly mobilising staggering amounts of money to protect the integrity of the eurozone — to "do whatever it takes" as Draghi himself so famously said a decade ago when the world was most worried about the eurozone and what its sovereign bond issuers owed.
It is unthinkable it would not do the same if sovereign debt sustainability became a real concern once more.