Blog Post

Could Italian private wealth compensate for flight of foreign bond-holders?

Italy’s deputy prime minister Matteo Salvini is "convinced" that Italians can help out their government, in the face of a widening yield spread between German and Italian government bonds. The authors assess the feasibility of recourse to household wealth in Italy, and estimate the relative importance of foreign debt-holders in the upcoming bond redemptions.

By: and Date: November 19, 2018 Topic: European Macroeconomics & Governance


“The strength of Italy, that none of the friends sitting around this table today has – neither the French, nor the Spanish – is a private wealth unequalled in the world. For now, it is silent and invested in foreign bonds. I am convinced that Italians are ready to lend us a hand [1]

Matteo Salvini, October 2018


 On the sidelines of the G6 meeting in Lyon, Italy’s deputy prime minister Matteo Salvini was asked about his government’s strategy, in case the spread between Italian and German government bond yields were to keep widening.

Salvini pointed to the often-celebrated level of Italian private wealth, and said he was convinced that Italians would be “ready to help”. A day later, Salvini was again on record discussing the idea of tax breaks for Italians investing in domestic government bonds. Some are arguing that the idea will be put to test next week, when the Italian Treasury is due to auction the BTP Italia – a bond that is targeted at retail investors.

To outside observers, these remarks appear to suggest that the government would not hesitate to resort to some form of financial repression in case of crisis. The rating agency Moody’s seems to share this view. In its latest rating action on Italy, Moody’s states that the decision to keep the outlook stable reflects “important credit strengths that balance the weakening fiscal prospects”, including the fact that “Italian households have high wealth levels, an important buffer against future shocks and also a potentially substantial source of funding for the government”.

Italy – unlike Greece and the other countries that came under pressure in 2010-12 – did not run large current account deficits in the run-up to the crisis, has been posting current account surpluses since 2013, and had a current account surplus of 2.8% in 2017. The counterpart of this is that recourse to foreign financing has been contained, and the Italian Net International Investment Position in 2017 was only -3.9% of GDP. This relatively stronger external position did not prevent Italy from undergoing a balance-of-payment crisis in 2011, however. And as we have previously discussed, recent balance-of-payment data point to significant outflows (almost €60 b) from Italian government securities in May and June. After a rebound in July, government bonds recorded another spate of outflows in August (€17.4 billion) – even before the start of the discussion on the controversial 2019 budget that has set Italy on a collision course with the European Commission.

But is a recourse to household wealth feasible? Can Italian households substitute for foreigners, if outflows continue? The Italian non-financial private sector has actually been decreasing its holdings of domestic government bonds in recent years, pointing to lower appetite for domestic debt. Data from the Bank of Italy’s financial account statistics show that Italian non-financial corporations held about €45 billion in government bonds at the end of 2018-Q2, down from €57 billion a year earlier. Similarly, households decreased their holdings of Italian government debt from €132 billion in 2017-Q2 to €115 billion in 2018-Q2.

An obvious question, with respect to the crisis-driven national solidarity that Salvini seems to be hinting at, pertains to size. To understand whether private wealth could serve as a buffer, we firstly need to understand what portion of outstanding Italian government securities due for redemption is held by foreigners who could suddenly decide to walk away from Italian political risk.

A geographical breakdown of redemptions is not available, but Unicredit provides a sectoral breakdown of holdings by type of security at the end of 2017 (Table 1). The breakdown shows that foreigners were relatively more present in the shorter end of the maturity distribution. Foreigners were holding 20% of CCTs (seven-year maturity), 33% of BTPs (various medium-long maturities), and 77% of BOTs (maturity up to one year).

To have a very rough idea of the relative importance of foreign holders in the upcoming redemptions, we assumed that the shares of BTPs and CCTs held by foreigners remained fairly constant since last year, and we calculated the resulting share of newly issued BOTs in non-residents’ hands. In order for the total of outstanding bonds owned abroad to be consistent with the current figures provided by the Bank of Italy, and contained in our database on sovereign bonds holdings, we estimate that approximately 58% of BOTs are owned by foreigners at present. We then apply these shares to each redemption – thus assuming that the sectoral breakdown of ownership for each redemption is the same as the aggregate[2].

Figure 1 below shows the result of this exercise. The estimated foreign share of redemptions is on average 45%, but reaches as high as 58% in some months when redemptions entirely consist of short-term BOTs (left-hand side panel). In absolute numbers, our back-of-the-envelope calculations suggest that redemptions to foreigners are worth about €121 billion between today and the end of 2019 (right-hand side panel).

This figure points to a significant need for roll-over foreign holdings, even before considering the additional €10 billion of additional deficit that is implied by the government budget plan for 2019 compared to 2018. Can Italian households be expected to come to the rescue?

The first thing to notice is that the repeatedly celebrated Italian private wealth has actually been constantly declining over the past few years. Mean household net wealth was approximately €258,000 in 2010 and €206,000 in 2016, which amounts to a decrease of more than 20% over six years (Figure 2)[3].

Total net wealth remains significant, however. Multiplying the mean net wealth by the total number of households (about 25 million in 2016, according to the Bank of Italy households survey data) we obtain a total stock of net wealth of €5,268 billion. The €121 billion-worth of redemptions that we estimate to be due to foreigners in 2019 looks very small in comparison. Even under the extreme assumption that the entire foreign share had to be rolled-over domestically and purchased by households, the total would amount to slightly less than 2.5% of total net wealth.

But are things really that simple? Most likely not. First of all, wealth taxes or similar solutions are politically toxic. There are episodes when similar calls to national unity worked: for example, Belgium during the euro crisis asked its citizens to help the government refinance its debt obligations at a rate of 4% so as to apply downward pressure to then-rising market rates, and the call was successful. Even in Italy itself, the ‘BTP italia’ – which is constructed to be appealing to retail investors – was first launched in 2012, during the country’s period of crisis. But in that case, it obviously was not an imposition. The last time that a similar solidarity effort was imposed was with the deposit levy by Giuliano Amato in 1992 – and that seems to still be a vivid memory that catalyses major opposition.

Tailored issuance and tax incentives seem to be what the current government also has in mind.  But Italians are unlikely to voluntarily devolve up to 2.5% of their net wealth to fund the roll-over, if there remains uncertainty over Italian public finances and/or Italy’s membership of the euro.

What is left, therefore, is coercion. Such an approach is hardly going to be tenable from a political standpoint, for two reasons. If Italy were to find itself in a situation where households have to come to the rescue, and significantly substitute for foreign funding, this would most likely occur in the context of a crisis of important proportions: the horizon of ‘solidarity’ would hardly be limited to 2019 (as we assume here) and the size would hardly be limited to 2.5% of total net wealth – although it may not be as extreme as the 20% recently proposed by Bundesbank economist Karsten Wendorff.

Figure 3 shows that the north and centre of Italy – areas that have predominantly endorsed the League’s fiscal promises to reduce revenues and taxation – would have to contribute relatively more than the Mezzogiorno – i.e. areas that have instead predominantly endorsed the Five Star Movement’s fiscal promise to expand the welfare state – due to the relatively higher neat mean wealth in those areas.

Imposing such a solution in an environment of perfect capital mobility such as the euro area may simply be impossible: deprived of ‘voice’, Italian savers may ultimately resort to ‘exit’ towards safer bank accounts. As a matter of fact, news reports already point to increasing numbers of citizens looking into the option of moving their savings to neighbouring Switzerland.

But the option of moving money is not equally available to everyone: the relatively richer and more financially literate part of the population would likely be quicker to resort to ‘exit’, thus leaving it to the relatively poorer and less mobile savers to show solidarity. Inequality would increase, and the strains within Italian society would deepen with it.



[1] The original quote in Italian reads: “La forza dell’Italia, che nessun altro degli amici seduti al tavolo oggi ha, né i francesi, né gli spagnoli, è un risparmio privato che non ha eguali al mondo. Per il momento è silenzioso e viene investito in titoli stranieri. Io sono convinto che gli italiani siano pronti a darci una mano”

[2] This is necessarily a rough estimate. It is worth reminding that foreign holdings are diverse and they could also account for (i) central banks holdings (other than Eurosystem); (ii) indirect holdings that could ultimately be traced back to Italian owners.

[3] The 2018 wave of the household survey suggest that the decline is mostly explained by development in house prices.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author


Why Europe needs a change of mind-set to fend off the risks of recession

Recession! This is the new worry in Europe and the US. A simple look at google trends shows that in Germany, France and the US, search interest for recession peaked in the last weeks. In Italy, the peak already occurred end of January. Whether a recession is actually occurring is difficult to gauge in real time. But there can be no doubt that significant risks such as the trade war and no-deal Brexit exist.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 2, 2019
Read article More on this topic

Blog Post

‘Lo spread’: The collateral damage of Italy’s confrontation with the EU

The authors assess whether the European Commission's actions towards Italy since September 2018 have had a visible impact on the spread between Italian sovereign-bond yields and those of Germany, and particularly whether the Commission’s warnings have acted as a ‘signalling device’ for bond-market participants that it might be difficult for Italy to obtain the support of the ESM or the ECB’s OMT programme if needed.

By: Grégory Claeys and Jan Mazza Topic: European Macroeconomics & Governance Date: July 8, 2019
Read article More on this topic More by this author

Blog Post

GNI-per-head rankings: The sad stories of Greece and Italy

No other country lost as many positions as Greece and Italy in the rankings of European countries by Gross National Income per head, between 1990 and 2017. The tentative conclusion here is that more complex, country-specific stories – beyond the euro, or the specific euro-area fiscal rules – are needed to explain these individual performances.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: June 18, 2019
Read article More on this topic More by this author

Blog Post

Uncertainty over output gap and structural-balance estimates remains elevated

The EU fiscal framework strongly relies on the structural budget balance indicator, which aims to measure the ‘underlying’ position of the budget. But this indicator is not observed, only estimations can be made. This post shows that estimates of the European Commission, the IMF, the OECD and national governments widely differ from each other and all estimates are subject to very large annual revisions. The EU should get rid of the fiscal rules that rely on structural balance estimates and use this opportunity to fundamentally reform its fiscal framework.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: June 17, 2019
Read article More on this topic More by this author

Blog Post

Developing resilient bail-in capital

Europe’s largest banks have made progress in issuing bail-inable securities that shelter taxpayers from bank failures. But the now-finalised revision of the bank resolution directive and a new policy of the SRB will make requirements to issue such securities more onerous for other banks. In order to strengthen banking-system resilience, EU capital-market regulation should facilitate exposures of long-term institutional investors.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: April 29, 2019
Read article More on this topic More by this author


Takeaways from Xi Jinping’s visit to France and Italy and ideas for the EU-China summit

The author appraises China's strategy towards Europe ahead of next month's EU-China summit.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: March 27, 2019
Read article More on this topic

Blog Post

The higher yield on Italian government securities is becoming a burden for the real economy

Francesco Papadia and Inês Gonçalves Raposo have recently written on Italian fiscal policy and the increase in the spread between Italian (BTP) and German (Bund) government. Since then, two developments have taken place: one good, and one bad. This blog post reviews them.

By: Francesco Papadia and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 5, 2019
Read article Download PDF More on this topic

Policy Contribution

Equity finance and capital market integration in Europe

Facilitating the financing of European companies through external equity is a central ambition of European Union financial regulation, including in the European Commission’s capital markets union agenda. Against this background, the authors examine the present use of external equity by EU companies, the roles of listings on public markets, and the regulatory impediments in national laws. They assess to what extent EU market integration has overcome the crucial obstacle of shallow local capital markets.

By: Inês Goncalves Raposo and Alexander Lehmann Topic: Finance & Financial Regulation Date: January 17, 2019
Read article Download PDF More on this topic

External Publication

Analysis of developments in EU capital flows in the global context

The monitoring and analysis of capital movements is essential for policymakers, given that capital flows can have welfare implications. This report, commissioned by the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union, aims to analyse capital movements in the European Union in a global context.

By: Grégory Claeys, Maria Demertzis, Konstantinos Efstathiou, Inês Goncalves Raposo, Alexander Lehmann and David Pichler Topic: European Macroeconomics & Governance Date: January 17, 2019
Read article More on this topic More by this author

Blog Post

ECB’s huge forecasting errors undermine credibility of current forecasts

In the past five years ECB forecasts have proven to be systematically incorrect: core inflation remained broadly stable at 1% despite the stubbornly predicted increase, while the unemployment rate fell faster than predicted. Such forecast errors, which are also inconsistent with each other, raise serious doubts about the reliability of the ECB’s current forecast of accelerating core inflation and necessitates a reflection on the inflation aim of the ECB.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 6, 2018
Read article More on this topic More by this author


The great macro divergence

Global growth is expected to continue in 2019 and 2020, albeit at a slower pace. Forecasters are notoriously bad, however, at spotting macroeconomic turning points and the road ahead is hard to read. Potential obstacles abound.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: December 5, 2018
Read article More by this author


The world deserves a more effective G20

As the presidency shifts from Argentina to Japan at Buenos Aires (and then to Saudi Arabia) it is worth asking why the G20 has endured this long and what it needs to remain relevant in a dramatically changed world.

By: Suman Bery Topic: Finance & Financial Regulation, Global Economics & Governance Date: November 29, 2018
Load more posts