Italy’s debt saga
Ever since Europe’s sovereign- debt saga began, euro- area policymakers have feared that the turmoil afflicting Greece, and then Ireland and Portugal, would engulf larger economies. Most attention was focused on Spain, a country that remains in peril. However, the contagion spread to another and even more alarming country: Italy.
Earlier this year, the staging of an unexpected bond markets buyers’ strike drove yields on Italian debt to their highest levels in a decade. The violence was simultaneous with sharp falls in the shares of Italian banks. However, efforts were made to calm the market, but the negative perceptions had already been established to cause the damage. There could not be any more denying the fact that Italy, the Euro area’s third- largest economy and the world’s thirdbiggest issuer of government bonds, had been sucked into the debt crisis.
Italy’s massive debts total € 1.9 trillion. For years, the country’s economy has not posed any problems due to its capacity to keep up with repayments, but as a dramatic change, investors have started to see Italy as a weak link in the Eurozone owing to the size of the debt pile and most importantly its debt- toGDP ratio, which is the second highest in the EU at 120 percent of GDP.
Italy has an eager rush to boost the Eurozone bailout fund, as over this year the country needs to borrow about € 360 billion. But due to the risky prospects, investors demand higher and higher rates of return for buying debt, which makes it difficult for the country to afford this borrowing. This is because if the country gets to the point where it cannot auction enough debt to keep this up at an affordable rate, it would be faced with the prospect of defaulting on its debts. A much bigger fear overhauls this entire situation, of the inability of Eurozone to afford to bail out Italy due to the debt size. Experts are concerned for a domino effect in which the markets may then start shunning the bonds of the next weakest link in the Euro area.
Importantly, Italy scores low at the 80th rank in the World Bank indicator of ease to do business. The problem is bureaucracy and sluggishness of the justice system in courts to clear financial and business matters. Therefore, the effects of the recession on the people of Italy are very real - especially for younger people who have lost their jobs sooner than the older generation who are protected by better contracts.
While economists still show a degree of optimism that Italy can weather this, but only if the Eurozone leaders can get their act together. Italy is a design and manufacturing powerhouse, home to some of the world’s most famous companies, and has a highly educated population.
According to Bank of Italy estimates, Italy’s private wealth is also one of the highest in Europe at nearly € 9,000 billion. But the country is dragged back by its ageing population, bureaucracy, corruption and tax- avoiding black market.
Italian figures are pressing for more fundamental changes to free up a moribund economy and spur growth. “Italy only reacts under an emergency,” says the boss of an Italian financial institution, “Now there is one.”