Italy: too big to fail?
Jun 28, 2012
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Italy is another “ticking time-bomb”, says Capital Economics. At first glance, Italy seems better off than most European countries. Its banks never overdosed on property and appear comparatively well capitalised. And its budget deficit is set to be just 2.4% of GDP this year, less than a third of Britain’s 8%.
But while Italy isn’t adding fresh debt to its overall debt pile very quickly, the pile is already worth a massive 120% of GDP. So it is especially vulnerable to interest rates rising fast, which they now are. The recession is deepening and investors are worried that there is scant prospect of growth to help work off the debt mountain any time soon.
There is also growing resistance, “in politics, business, trade unions and other interest groups, to any serious efforts at...economic reform”, says Bill Emmott in The Times – “the same sort of resistance that explains why the country’s debt” has never been properly tackled.
The prime minister, Mario Monti, who has headed a government of technocrats for the past seven months, has had to water down laws to reform Italy’s rigid labour laws and has had scant success liberalising various sectors of the economy.
In short, the prospect of Italy being able to grow faster longer term, and thus get its debt under control, has receded. With elections approaching, the momentum for reform will ebb even further. To complicate matters, both a radical comedian and the former prime minister, Silvio Berlusconi, have talked of leaving the euro.
So bond markets can’t expect further economic reforms from Monti, “and they can have no idea what political leadership Italy will have in a few months’ time or what that leadership’s view of the euro will be”, says Emmott.
This is hardly reassuring, considering Italy is Europe’s third-biggest economy and needs to roll over 10% of its €2trn of debt in the second half of this year. “It would be no surprise if Italy fell into the hands of international creditors before too long,” says Fxpro.com. But if, as seems likely, Spain succumbs to a bail-out first, there wouldn’t be enough money in the rescue funds to cover Italy. Europe’s third-largest economy is too big to fail.
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