Italy's debt crisis: 10 reasons to be fearful

[Gob]

Italy's debt crisis: 10 reasons to be fearful

1 Italy is the eighth-largest economy in the world and the fourth largest in Europe. Its gross domestic product was over $US2 trillion ($1.97 trillion) in 2010. Greece, Europe's other basket case, has a GDP of $US305 billion.



2 The country is label-queen heaven - Ferrari, Prada, Armani etc - and a major player in utilities, telecoms and banking. But the recession has put a strain on its economy and a succession of pop-up governments have failed to tackle fundamental problems, including the massive pension debts owed its ageing population. Italy's debts now top $US2.2 trillion, or 120 per cent of gross domestic product.



3 The debt matters because Italy is one of the world's largest markets for government bonds. Fears that Italy cannot pay what it owes on government debt have driven rates on Italian bonds to over 7 per cent. The levels are higher than bond prices reached in Ireland and Portugal before they had to be bailed out.



4 Higher bond rates should, in theory, make Italy more attractive to investors. But what it really indicates is that the country has lost the faith of the markets. It probably doesn't help that Berlusconi pretended to fall asleep during key meetings with European leaders. Credit rating agencies have already cut Italy's credit scores.



5 The speed at which government bond crises can escalate is startling: in April 2010, 10-year bond yields in Greece hit 7 per cent; within a month they had reached 12 per cent, prompting Greece's first bailout package. In Ireland, 10-year bond yields hit 7 per cent in November 2010; a month later it had risen above 9 per cent, triggering a bailout. In Portugal, yields hit 7 per cent in November 2010; the bailout came in May.



6 Last month, Berlusconi promised wholesale reforms in Italy. They included a commitment to raise the pension age to 67 by 2026; steps to make it easier for companies to fire workers; and asset sales and other measures to improve conditions for business. But Berlusconi's sketchy reforms failed to please anyone and met with a political backlash and business scepticism.



7 ''At this point, Italy may be beyond the point of no return,'' Barclays Capital said in a gloomy report this week. ''We doubt that Italian economic reforms alone will be sufficient to rehabilitate the Italian credit and eliminate the possibility of a debilitating confidence crisis.''



8 Analysts Capital Economics calculate that if Italy's cost of borrowing continues to soar, it will have to raise around €650 billion ($869 billion) for the next three years or so. Clearly it doesn't have that cash, so it will have to turn to the European Financial Stability Facility (EFSF), the bailout fund that is backed by Euro big boys including Germany, France and - you've guessed it - Italy.



9 The European Financial Stability Facility doesn't have unlimited cash and a multi-year financing program for Italy would seriously deplete funds. If it can't save Italy, who is next? The European Central Bank (ECB), possibly, but it has been unwilling to step in for fear of ''moral hazard'' - the risk that euro zone countries will not make any move to put their accounts in order if they believe a bailout is coming. Economists fear that matters will have to get even worse before the Central Bank steps in. If Italy has to leave the euro and go back to the lira, the whole euro zone is in jeopardy.



10 US officials keep saying that American banks have little ''direct'' exposure to Italy. But US institutions have been snapping up credit default swaps (CDSs) as insurance against credit losses. If Italy goes down in a disorderly default, it will make the Lehman Brothers collapse feel like a Roman holiday.



Read more: http://www.smh.com.au/world/italys-debt ... z1dNHssewN

[dgs49]

The solution for Italy (and everyplace else) is simple, but not easy.

Bring spending in line with revenues. Cut entitlements. Reduce the size of government. Enforce the tax laws (tax evasion is the national sport of Italy) or devise taxes that are impossible to evade.

The gravy train is out of fuel. Deal with it like adults.

[Scooter]

Actually, it is ironic, but even though Italy's total debt is high, it's deficit as a percentage of GDP is lower than most of the world's major economies which no one would consider to be "in trouble".

[rubato]

The thing which created this whole crisis was a banking system who thought that because 'someone', the EU or ECB, would always bail them out they didn't have to price risk correctly. This was driven by a huge tidal 'push' of excess investment capital in an era when no one was adding capacity (because of excess capacity) so it had to go somewhere.

An unregulated or improperly regulated financial system. Exactly what happened to the mortgage markets in the UK and the US.

The long-term answer is r-e-g-u-l-a-t-i-o-n.

yrs,
rubato