Photo: Wikimedia Commons
It’s fair to say that Italy is the 800-kg. zucchini in the room when it comes to European peripheral debt.So how grave is Italy’s situation?
The Global Equity Strategy team at Credit Suisse suggests you should relax a little.
Here’s the core of their case:
• Italy has a budget deficit of only 4.1% of GDP and actually runs a primary budget surplus of 0.6% of GDP, on IMF data (the only European country to do so apart from Switzerland and Norway!).
• Total leverage in Italy (government and private) is below the Euro norm. This is
because very high levels of government debt (121% of GDP) are offset by low
private sector leverage (total private sector leverage is 125% of GDP — about half
the level of Spain and Portugal — because unlike most of the periphery there was no
housing or private sector credit boom in the last decade). Total non-financial
leverage in the economy is 246% of GDP (compared to 260% in the Euro-area
overall and 280% in the U.K.).
• Net foreign liabilities are just 21% of GDP (this compares to a peripheral European
norm of close to 100% of GDP). This is absolutely critical because it means that in
a worse-case scenario, namely a disorderly break up of the Euro, Italy would not
need to default. A 50% currency devaluation would still leave net foreign liabilities
circa 40% of GDP, a manageable level in our view.
• Italian bank borrowing from the ECB is just 5% of GDP (for Greece it is 45% of
GDP), while the loan-to-deposit ratio at around 100% is lower than elsewhere.
• The loss of competitiveness in Italy and low growth is an issue. But with a current
account deficit of 3.9% of GDP, the loss of competitiveness appears to be smaller
than Greece and Portugal (where the current account deficit is 9.6% and 8.9% of
• Italy’s sovereign debt has an average maturity of 7.2 years and about half of this is
owned by domestic investors (both higher than elsewhere). This means that each
1% rise in bond yield after 1 year only adds 0.4% of GDP to funding costs,
according to the Italian Minister of Finance.
• Ultimately, Italy has been willing to take some painful fiscal measures with a new
austerity package of €60bn (3.8% of GDP) between 2011 and 2014 (even if, like in
the U.S., the process appears to be hazardous).
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