Italy: Is there really strong market discipline?

As we have seen, and probably will see again, the Italian government has refrained from running up an excessive fiscal deficit because of the reaction of long-term interest rates, and therefore because of the presence of market discipline. But is market discipline really strong? On the one hand, if investors do not believe in an Italian exit from the euro or an Italian debt restructuring, they will rapidly buy Italian government bonds to take advantage of their higher yield , which we are seeing now and which limit s the widening of Italy’s yield spread and weakens market discipline; On the other hand, as the correlation between sovereign risk and banking risk is still strong, the Italian government knows that if it lets the yield spread on the public debt rise it will worsen Italian banks ’ situation , which reinforces market discipline. All things considered, it is reasonable to think that market discipline exists for Italy, but is not extremely drastic thanks to the appeal of higher bond yields for investors.