Fathom’s proprietary ‘probability of default’ indicators use market pricing to infer the perceived likelihood of sovereign defaults occurring within various time periods. The volatility in these indicators has declined substantially since the heights of the euro area crisis. Nevertheless, recent events in Italy have caused a spike in volatility. At 14%, the market-implied probability of default within the next five years remains relatively low. However, the risk is twice as high at the ten-year horizon, with market participants evidently concerned by the country’s elevated public debt burden
For now, the sovereign still enjoys access to capital markets with the government successfully issuing €7.75bn of debt recently, including a ten-year bond offering investors a 3.25% yield. However, the coalition’s proposed fiscal expansion may try the patience of markets; ratings agency Fitch has revised its outlook down to “negative” ahead of the government’s October budget announcement. While yields remain low by historical standards, the trajectory of Italian debt remains sensitive to any rise in funding costs, especially given that the country is due to refinance almost one-third of its debt by the end of 2020.
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