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Italian Melt(down)

Italy debt downgrade

Image source: rawf8 - Shutterstock

What's going on?

Credit rating agency Moody’s has cut Italian bank Monte dei Paschi’s rating again – saying it’s even less likely to repay its debts than previously thought. That’s bad news for the world’s oldest bank.

What does this mean?

With Italy on the cusp of a recession, and its debt ballooning to a third larger than its entire economy (to which the country’s government wants to add even more), investors in the country’s government’s bonds risk not getting paid back.

But Italian banks have been increasing their holdings of those bonds – to the tune of $61 billion since May – with Monte dei Paschi one of those helping compensate for slack demand among individual investors. Now, in a cruel twist of fate, Moody’s thinks that Monte dei Paschi’s investment in Italian government debt has made its own bonds a riskier prospect.

Why should I care?

For markets: Bonds aren’t the flavor of the month.

The global market for company bonds is heading for its worst year since 2008: investors have yanked $65 billion from investments in the riskiest ones, according to the Financial Times. In Europe, that’s partly because the European Central Bank is ending its bond-buying program, reducing demand and driving prices down. In the US, the expectation of higher interest rates (and therefore new bonds that will pay better) means there’s less demand for current bonds.

The bigger picture: Piling on Sri Lanka.

Two other debt rating agencies – Standard & Poor’s and Fitch – were also in action on Tuesday, slashing their ratings for Sri Lankan government bonds. Political turmoil in the country has effectively left it without a functioning government – meaning it’ll struggle to agree on a spending plan for next year, when it’s got a lot of debt to repay and likely replace (a.k.a. refinance). While the country says it has a plan to raise fresh moolah, the agencies think there’s now a greater risk of investors not getting paid back.

Originally posted as part of the Finimize daily email.

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