Source: Bloomberg

Here’s the key data point for Italy: ECB purchases of BTPS are larger than the country’s budget deficit, which is to say that the ECB has financed more than the entire Italian budget deficit (2.5% of GDP flow, 132% of GDP stock).

The risk is that as the ECB tapers and yields rise, Italy will have trouble financing its deficit. A 1% rise in the overall yield level will cost Italy 1.3% of GDP and bring the deficit (all else equal) to 3.8% of GDP. If Italian spreads rise faster than German spreads, the cost could of course be much higher.

This is likely to occur in the context of a political stalemate in which the center-left (Renzi’s Democratic Party) continues to implode, but Berlusconi’s Center-Right can’t form a majority without the populists (Lega Nord, Five Star Movement). Anti-EC sentiment is being exacerbated by Italy’s immigration crisis, and fiscal pressure could intensify Europskepticism in Italy.