Italy’s debt saga

Enterprise - - Interview -

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.”

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