Italian assets have taken a pounding in recent weeks — here’s why Goldman Sachs thinks it could get a whole lot worse


  • Italian stocks and bonds rebounded a little on Monday after ratings agency Moody’s left the country’s debt with an investment grade rating.
  • The bounce is likely to be short-lived, however, as investors simply don’t think Italy’s fiscal path is sustainable.
  • The government wants to increase the budget deficit, and implement a large scale fiscal stimulus.
  • Goldman Sachs’ Silvia Ardagna thinks the situation could get worse.

Italian assets are showing signs of a nascent recovery this week, boosted by ratings agency Moody’s leaving the country’s government debt at investment level.

Moody’s downgraded Italian debt to a Baa3 rating, placing it one notch above junk status – the point at which investments effectively become speculative bets – but also reaffirmed the country’s outlook as stable, upgrading it from negative previously.

This was interpreted by markets as a reasonably good result, with many having feared that Italy could be moved into junk status.

Monday saw Italian assets across the board climb, and while the country’s stock market has slipped as part of a global sell-off on Tuesday, yields on the country’s benchmark 10-year bonds continue to fall off their recent highs, reflecting a renewed appetite for Italian assets from investors.

The comeback, however, looks set to be shortlived and assets could drop below even the multi-year lows witnessed last week. That’s according to Goldman Sachs economist Silvia Ardagna, who wrote this week that Italy’s “market situation may need to get worse before it gets better.”

Ardagna’s rationale is fairly straightforward. The Italian government does not want to take a backward step in the imposition of its new budget, which has led it to clash with Brussels.

The budget proposes increasing both Italy’s overall government debt and its deficit in the short run, pushing the deficit as high as 2.4% of GDP over the coming years. This means Italy will fall foul of a previously mandated maximum deficit level of 0.8% of GDP.

Brussels has repeatedly asked the coalition government to reconsider its plans, but Rome is refusing to budge, and will need a serious motivation to do so.

One such motivation could be a further adjustment lower in markets.

“Financial market participants understand there is value in correctly pricing not just the ‘end game,’ but also the path to that ‘end game’ and the risks around it,” Ardagna wrote to clients in a note earlier in October, before reiterating the point on Monday.

“From this perspective, our view is that market tensions would need to intensify in order to exert sufficient pressure on the Italian political system to trigger a change in the policy path and the political rhetoric around it.

“On that basis – and even if Italy does ultimately remain part of the Euro area – the market situation may need to get worse before it gets better,” she added.