Summary: The debt supercycle is a global phenomenon, with Italy one of the most afflicted nations. High levels of debt plus slow growth makes a toxic combination. Here Stratfor examines the numbers and their implications.
“If something cannot go on forever, it will stop.”
— Herbert Stein’s Law (US economist, 1916-1999).
Italy’s Shaky Financial Future
Stratfor, 18 December 2015
As with many aspects of modern banking, the word “bankrupt” has its roots in Renaissance Italy. The original banks were Florentine merchants who would sit in the open street behind benches (bancas in Italian) upon which their money would be stacked. If trading went against them and their capital was reduced to nothing, their bench would be said to be broken, or banca rotta. It is fitting then that, 500 years later, the European country with the most worrying debt problem is Italy.
This may be surprising to some, since Italy does not top the tables as worst offender by any of the usual metrics. It does not have the highest levels of debt to gross domestic product in Europe: That dubious honor belongs to Greece, whose debt to GDP ratio rests more than 40 points higher than Italy’s 132%. Nor are Italian banks afflicted with the highest quantities of nonperforming loans as a percentage of GDP. Cyprus wins that contest easily; at a staggering 137%, it relegates Ireland (23%) to a distant second place and far exceeds Italy at 17%.
But though Italy is not the worst offender, its size still makes it the most potentially problematic. Italy has the third largest economy in the eurozone after Germany and France, and it is 1.5 times bigger than fourth-ranked Spain. So even without having the highest ratios, in actual numbers Italy has the biggest debt mountain: 2.3 trillion euros (roughly $2.4 trillion) of government debt compared with Greece’s 392 billion euros. Thus the three recent Greek bailouts, though giant in relation to the Greek economy, were just a sliver of the European economy as a whole, and in their wake the eurozone carried on more or less unaffected. The same would not be true of Italy. A bailout would be a massive undertaking that would greatly stretch the union’s finances.
Of course, this is not an altogether new phenomenon. Italy’s debt to GDP ratio has been over 100% since the early 1990s, and GDP growth since then has been fairly stagnant. But the fact that Italy’s debt has been large for a long time does not mean it is not dangerous. It was the threat of Italy defaulting that drove much of the market panic during the sovereign debt crisis in 2011 and 2012, when weakness in Europe’s banks had prompted bailouts from their national governments, calling into question the solvency of the governments themselves.