Economists say Italy is the eurozone country most vulnerable to a debt crisis as the European Central Bank raises interest rates and buys fewer bonds in the coming months.

Select nine out of 10 economists in a poll conducted by the Financial Times Italia As the eurozone country “most at risk of uncorrelated selling in government bond markets”.

Italy’s right-wing coalition government, which took power in October under the prime minister Georgia Meloni, trying to follow the path of financial rectitude. The budget was earmarked for the country’s fiscal deficit to drop from 5.6 percent of GDP in 2022 to 4.5 percent in 2023 and 3 percent the following year.

But Italy’s public debt remains among the highest in Europe at just over 145 percent of GDP. Marco Valli, chief economist at Italy’s UniCredit bank, said the country’s “high debt refinancing needs” and the “potentially tricky” political situation made it more vulnerable to a sell-off in bond markets.

Borrowing costs in Rome have risen sharply since the European Central Bank began raising interest rates last summer. The 10-year yield rose above 4.6 percent last week, nearly four times the level it was a year ago and 2.1 percentage points above the equivalent yield on German bunds.

Meloni expressed her dismay at the European Central Bank’s willingness to continue raising interest rates despite the risks to growth and financial stability. It would help if the ECB handled its communication well. . . “Otherwise, it risks generating not panic but volatility in the market that negates the efforts of governments,” she said at a news conference last week.

Veronika Roharova, head of eurozone economics at Swiss bank Credit Suisse, said the new Italian government “has given investors few reasons to worry at the moment.” But concerns could resurface as growth slows and interest rates rise more and more [debt] The release is picking up again,” she added.

The ECB’s interest rate setters have insisted they will continue to raise interest rates in half-point increments through the first months of this year. Klas Nott, governor of the Dutch central bank and a hawk on the governing council, told the Financial Times that the central bank had been fair. Start The “second half” of the price increase cycle.

However, analysts believe that the ECB is overestimating inflation risks – and underestimating the likelihood of a recession. Managing Director of the International Monetary Fund, Kristalina Georgieva He said At the end of the week, half of the European Union will be in recession this year. Four-fifths of the 37 economists polled by the Financial Times in December had their forecasts European Central Bank It will stop raising prices in the first six months of 2023 and two-thirds expect it will start lowering prices the following year in response to weak growth.

On average, they predicted that the ECB’s deposit rate would peak at just under 3 percent, below the level investors are betting on as evidenced by interest rate swaps.

A separate Financial Times poll of more than 100 senior UK-based economists found this Britain will endure one of the worst recessions And the weakest recoveries in the Group of Seven in 2023.

Central banks were all over the world raise rates sharply to tackle inflation, which has risen to multi-decade highs in many countries, as energy and food prices soared after Russia’s invasion of Ukraine and the end of the coronavirus pandemic shutdowns increased demand for goods and services.

The European Central Bank has been slower than many Western central banks to start raising interest rates, but since last summer it has tightened policy at an unprecedented pace, raising the deposit rate from 0.5 percent to 2 percent in six months.

The European Central Bank has been very slow [in] “The realization that inflation was not temporary, but is now rapidly advancing,” said Jesper Ranjved, professor of finance at Copenhagen Business School. “I still fear, though, that the ECB will not tighten enough because of the problems this could cause in Italy.”

The European Central Bank is set to start shrank Its €5tn bond portfolio increased by €15bn per month from March through partial replacement of outstanding securities, adding upward pressure on Italy’s borrowing costs. Ludovic Soprane, chief economist at German insurance company Allianz, said the eurozone risks a repeat of the 2012 bond market crash “because fiscal capacities vary across countries without the ECB’s heavy lifting”.

Italian government ministers criticized the European Central Bank for its strong monetary tightening. Defense Minister Guido Crocito wrote on Twitter that the ECB’s policies “make no sense” while Deputy Prime Minister Matteo Salvini said higher rates would “burn billions in Italian savings”.

“Italy’s high stock of debt, the high fiscal deficit and the need for additional energy support measures . . . is making the markets very anxious,” said Silvia Ardagna, chief European economist at Britain’s Barclays Bank.

The European Central Bank unveiled a new bond-buying scheme, known as the Transfer Protection Instrument, which is designed to tackle unjustified rises in a country’s borrowing costs. However, more than two-thirds of economists polled by the Financial Times in December said they expected the ECB to never use it.

A deeper-than-expected recession next year “may put high-deficit and high-indebted countries under more pressure,” said Mujtaba Rahman, managing director for Europe of Eurasia Consulting Group, adding that this “has the potential to lead to a softer path for monetary policy.” European Central.

Additional reporting by Amy Kazmin in Rome