Barron's--The Last Thing the World Needs Is an Italian Debt Crisis
The last thing that a fragile world economy needs right now is another round of the European sovereign-debt crisis. Yet judging by recent Italian economic and political developments, that is what could very well happen as early as this winter. These dynamics will constitute a major challenge for a European Central Bank that is working to keep the euro zone together. It could also add to world financial market volatility.
Italy’s systemic importance is underlined by its very size. Not only is Italy’s $2 trillion economy some ten times that of Greece, its almost $3 trillion sovereign-debt market is the world’s third largest, following the U.S. and Japan. If in 2010 a Greek sovereign-debt crisis sent shock waves through the world economy, how much more so would an Italian sovereign-debt crisis do so today?
Italy’s main economic vulnerabilities are its mountain of public debt and its sclerotic economic growth. At around 150%, Italy’s public debt-to-GDP ratio is now the highest in that country’s history and the second highest in the euro zone, after Greece. Meanwhile, Italy’s per capita income today is barely higher than it was in 1999, when Italy joined the euro.
Up until recently, markets had not raised serious questions about Italy’s debt sustainability. With interest rates at ultralow levels, Italy’s debt servicing costs were not particularly high. At the same time, as part of its quantitative easing program, over the past two years the ECB bought €250 billion of Italian government bonds (equivalent to $250 billion today). That represented more than the entirety of the Italian government’s net bond issuance.
Now, markets are starting to question the sustainability of Italy’s debt. The spread between 10-year government bonds issued by Italy and Germany has widened to their highest levels since the pandemic began. They are doing so as the ECB has begun an interest-rate hiking cycle and has terminated its quantitative easing programs. Simultaneously, Russian President Vladimir Putin’s decision to shut down Russian natural-gas exports to Europe threatens to throw Italy along with the rest of Europe into a meaningful economic recession.
It hardly helps matters that Italy’s euro membership makes it difficult for that country to put its public debt on a better footing through budget austerity. If it had its own currency, Italy could resort to exchange rate depreciation to incentivize its export sector as an offset to budget belt tightening. But as a member of the euro, this is impossible. Budget austerity would instead be counterproductive, since it could have the effect of deepening the Italian economic recession.
2. Italy or Japan - The Japs have had 30+ years of ever increasing Debt - I wonder if/when Soros will do to the Japs what he did to the British Pound the last time the Pound had parity with the $
3. Today's Italian Elections - will be interesting, wonder if they will have an impact on Monday's Wall Street open