Trouble in Italy?

Will debt-heavy Italy fall into a financial crisis when the European Central Bank stops buying its bonds as part of its region-wide stimulus program? Upbeat figures for GDP are supporting those who think it’s unlikely.

Economic output in the third quarter increased 1.7 percent over the year earlier, the best performance since 2011. But government debt remains high at 135 percent of GDP. And the ECB’s purchases of eurozone government bonds have helped keep Italy’s 10-year borrowing costs to a low annual rate of about 1.7 percent.

So what happens when that bond market support ends in late 2018? Economists argue that improved growth coupled with the likelihood that the central bank will only back off its stimulus slowly means investors won’t face a mess like the dark days of 2011, when high bond-market borrowing costs threatened the country’s finances. Part of it is simple math: a growing economy shrinks the relative size of the debt pile. Additionally, the ECB’s never-used emergency backstop for troubled countries, added to its arsenal in 2012, provides more security.

What could upset this upbeat view? A big win by populist politicians in next year’s election, followed by fiscal folly, followed by a serious turn in market sentiment. A lot of ifs: right now the betting is that Italy may have problems but a sovereign crisis won’t soon be one of them. Toll Brothers