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That sinking feeling
Italy may look like Greece writ large, but the truth is more complex
EVER since the euro zone’s sovereign-debt crisis began in earnest two years ago, the common fear has been that the sheer bulk of Italy meant it was too big for other countries to bail out, should it sink.
A quieter hope was that Italy’s size might also save it. If investors rushed out of Italian bonds, went the whispered argument, there were few big markets where they could then park their euros and still get a decent return (the smaller German bond market could not accommodate everyone without yields falling sharply). Scared investors often rush into the big and liquid market for US Treasuries, despite anxieties about America’s public finances. That safety-in-numbers logic ought to keep Italy from trouble, too.
Some hope: Italian bonds are now a badge of shame for banks who are rushing to dispose of them (see article). Their ten-year yields have jumped beyond 7% and, once euro-zone yields reach these levels, they tend to spiral out of control.
For some this proves that Italy is an oversize Greece: a country with a debt burden that is too heavy for it to bear and, unlike Greece, for others to help shoulder. There are uncomfortable parallels. Both countries’ public debts have long been bigger than their annual GDP. Both suffer crippling rigidities in their economies. But there are enough differences in Italy’s finances, and enough potential in its economy, to mean it could stay solvent if its borrowing costs could be capped at, say, 6%.
Start with the finances. One reason why markets eventually shunned Greece, Portugal and Ireland was the uncertainty about how far their debts might rise. All three had huge budget deficits (so were adding to their debts at an alarming rate) and were struggling to keep their economies on track, while at the same time cutting spending and raising taxes. Greece’s public debt was forecast to rise towards 190% of GDP, before some of its private-sector creditors agreed to a bigger write-off of what they are owed. Italy’s public debt, by contrast, is set to stabilise at around 120% of GDP in 2012. Its government will run a small surplus on its “primary” budget (ie, excluding interest costs) this year, and an overall deficit of less than 4% of GDP, below the euro-area average.
Italy has fewer foreign debts than the other troubled euro-zone countries, as it ran only modest current-account deficits in the boom years. Its net international debt (what Italy’s businesses, householders and government owe to foreigners, less the foreign assets they own) was 24% of GDP in 2010, not much above that of Britain or America, and well below the position in Greece (96%), Portugal (107%) or Spain (90%). Indeed Italy’s overall private-sector debts are modest by rich-country standards. This matters for the nation’s solvency.
Explore our interactive guide to Europe's troubled economiesIf less wealth goes outside Italy to service foreign debts, more is left to tax.
The healthy rate of Italian household saving underpinning this could be tapped by the government as an alternative to bond-market funding, which looks a lost cause. Because Italy’s deficit is fairly small and the average maturity of the bonds it has already issued is quite long (around seven years), it would take a while for higher borrowing costs to make a huge difference to its interest payments. Next year, Italy has
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