Italian bonds may be in trouble as investors avoid them, fearing a global economic slowdown. The bonds fell in value as the European Commission revised its growth forecast from 1.2% down to 0.2%, confirming many investor fears of a global economic slowdown. The announcement came just one month after the International Monetary Fund also reduced its growth predictions. In response, German bunds, considered a safe haven investment, have moved even higher. The Euro has also fallen in value by 0.3% as of January 25. The spread between Italian bonds and German bunds, considered to provide a good indication of the level of risk in the European market, widened to a two-month high in response. Another problem faced by the Italian Government, which will continue to have an impact on both bond yield and Euro value, is the level of their budget deficit.
On November 21,2018 Brussels rejected Italy’s budget, which proposed to raise its deficit from 0.8% to around 2.4%. If an agreement wasn’t reached, the European Union threatened to intervene to reduce the deficit. This could have involved penalties such as fines, which would have caused Italian bonds to weaken further. However, the Italian government did agree to a compromise with the European Union, bringing the deficit to around 2.04% and avoiding penalties. However, many investors still believe that this figure is too high, causing Italian bonds to drop. This has also caused the Euro to fall. Fears of an economic slowdown and the repercussions of Britain leaving the European Union might mean that further price drops could be in store for the Euro.
There are concerns that a weaker Euro would have an impact on all the countries within the European Union. There are a wide variety of factors that could combine to cause the currency to decline. Investors remain concerned about the potential of a global slowdown, as discussed above. However, Britain leaving the European Union could also impact the value of the currency. The impact of this event largely depends on weather a deal is agreed to and what the terms of the deal are. Finally, investors are concerned about a potential trade war developing between America and China – this could have worldwide implications. The effects of a trade war are difficult to predict, especially because the political situation changes so rapidly. This can also cause rapid changes in currency values. While these factors are difficult to predict, it is likely that they will result in downward pressure being placed on the Euro and a potential drop in the currency’s value.
The recent drop in value in Italian bonds and the Euro has many investors questioning whether they should invest in Italy. Because of this uncertainty, German bunds, considered a safe haven investment, have risen in value. It is likely that this uncertainty will continue into the future with investors remaining concerned about a potential trade war and the upcoming Brexit.
