Italy is no Greek crisis in the making

But risks posed by it tripping up would have graver consequences for the Eurozone

After days of increasing risk spreads, and after prominent politician Claudio Borghi said there was an advantage to having your “own currency”, Italy is back squarely on both public and private radar screens as a potential source of systemic economic and financial disruptions.

This has led to suggestions that the country could become “a new Greece”.

While there are similarities between the Italian and Greek cases, the differences are big enough to suggest that investors in Italy should focus on a different set of factors. In less than two weeks, the risk spread on 10-year Italian bonds has climbed about 60 basis points to around 3 per cent, a level not seen since 2014.

The immediate trigger was the government’s announcement of a budget deficit target that exceeds the European Union’s guideline. But the deeper contributors are the mediumterm mix of high public debt, some unsteady banks and persistently sluggish growth.

Unlike Greece, Italy is one of the largest economies in Europe and an original member of the European economic integration project. Because of its size, its gross funding needs in euro terms are sizeable relative to the regional safety nets put in place to deal with troubled countries.

As such, a big problem with Italy would constitute a much larger and more durable source of systemic risk. If it were to stumble very badly, the country could present an existential threat for the Eurozone.

No current account deficit

But also unlike Greece, Italy doesn’t have a current account deficit and the average duration of its outstanding debt is longer. With lower risk of financial default in the short-term, the main determinant of possible disruptions resides in dislocations originating from domestic and regional politics. That is the most important factor for investors to monitor closely.

What ultimately saved Greece’s membership in the Eurozone a few years ago was the imminent threat of default. Fearing a shock that would tip the economy into a multi-year depression, the Syriza coalition government opted for an orthodox approach even though it had won both the election and the referendum by backing a political agenda that advocated doing the opposite.

The hope of many investors — as well as EU officials, ECB officials and several policymakers in European capitals — is that the Italian government will perform a similar pivot.

In doing so, Rome would need to design a more comprehensive programme aimed at generating high, inclusive and sustainable growth.