Who would you lend to – Italy or Peston?

BBC Business Editor Robert Peston Would you lend money to this man?

Who would you expect to pay a higher rate of interest when borrowing for three years?

Me or the Italian Republic?

If you said "Peston", you are right. The markets apparently regard me as a worse credit risk than the government of the world's eighth largest economy - largely because individuals have a sorrier history in general of repaying what they owe than the public sectors of first-rank developed economies.

But here's the thing: the risk premium for lending to the slightly shambolic household of Peston, as opposed to the sovereign nation of Italy, is rather less than I expected.

According to those online money comparison websites, I can borrow £10,000 for 5.9% - with very few questions asked of me.

As for Italy, today it borrowed 3 billion euros for three years today at an interest rate 5.3%, in one of its regular bond auctions.

The gap between the interest paid by the two of us, 0.6% or 60 basis points (in the jargon), seems to put us in a similar borrowing category.

And before you ask, £10,000 is a bigger proportion of my annual earnings, than is 3 bilion euros as a proportion of Italian output or GDP.

So why is the Italian government's credit-worthiness perceived to be only marginally better than mine.

Well Italy starts with rather more debt than me - around 2 trillion euros or 120% of its GDP or income. My debt is a much smaller proportion of my income.

And Italian GDP is shrinking, as is mine - in real or inflation adjusted terms - but maybe not as fast.

Also in the coming year Italy has to borrow 450 billion euros in total to refinance maturing debt and its new borrowing needs. I have no debts that mature this year that need to be rolled over or refinanced.

What's more, Italy may have to fork out a few tens of billions of euros to recapitalise its banks - which is less than Spain's banking bill but rather more than the banking liability I face.

There's another thing: if demand for my output falls, I can always cut what I charge for my services; but if Italy's exports are perceived to be too expensive, it cannot cut their price because it has no independent currency to devalue.

All in all, and now that I think about it, I wonder whether I should be offended that it costs me more than the Italian Republic to borrow.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

How Labour pays for student fee cut

Labour would reduce tax relief for those earning £150,000 or more a year, shrink maximum pension pots to £1m and cut maximum annual pension contributions to £30,000 to pay for a cut to £6,000 in student fees.

Read full article

More on This Story

More from Robert


This entry is now closed for comments

Jump to comments pagination

Page 4 of 5



Copyright © 2015 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.