Monday, March 12, 2012

Italy - Europe's Next Debt Casualty?

With the Greece debt problem apparently "solved", at least for the time being, I thought that it was time to take a fresh look at Europe's largest nominal debt transgressor and the world's third largest overall debtor nation; Italy.

According to the most recent data from the Banca D'Italia, Italy's central bank, on September 30, 2011, Italy's external debt stood at €1.847 trillion or $2.42 trillion US.  Using a 2011 GDP of €1.826 trillion from the CIA World Factbook, Italy's 2011 debt-to-GDP rings in at just over 132 percent, just over twice the European Union limit of 60 percent.   Unfortunately, Italy's debt keeps rising while its GDP doesn't as shown on this graph:

According to Scotiabank's March 2012 Global Economic Research, Italy's economy grew by only 0.7 percent annually over the ten year period from 2000 to 2010 and grew by an estimated 0.4 percent in 2011.  It is projected to shrink by 1.9 percent in 2012 and by another 0.3 percent in 2013 as shown on this chart:

To put these economic growth numbers into perspective with the debt growth numbers, at the beginning of 2008, Italy's external debt was €1.698 trillion.  To the end of the third quarter of 2011, this level had risen by 8 percent or €149 billion.  During that same time frame, Italy's economy actually shrank, making the debt-to-GDP level rise even more than it normally would if only one factor in the equation had changed.  This has resulted in an ever-climbing debt-to-GDP ratio as shown here:

With very limited prospects for an improved economy in Italy for the next two years, it will be increasingly difficult for the nation to grow its way out of its debt trap.  It's kind of like a gigantic fiscal Chinese finger puzzle; the harder they try, the worse it gets!

It's also interesting to look at this graph showing how Italy's sovereign debt growth has accompanied (or perhaps resulted in) a declining economic growth rate:

Here's another graph showing how profligate spending by successive governments all the way back to  the 1960s are what has caused the problem:

In the past 50 years, Italy has never taken in more in revenue than they have spent in total.

Now, let's look at what could cause the next Eurozone crisis.  Here is a graph showing details regarding the maturity dates for Italy's outstanding inventory of sovereign bonds:

Notice the massive amount of government debt that is due to be rolled over in the period between 2012 and 2015?  That's where the problem lies.  In 2012 alone, €333.8 billion is maturing as shown on this chart:

In total, over €600 billion is maturing in the next four years, dwarfing the current Greek debt problem.  Currently, Europe's homegrown debt solution, the European Financial Stability Fund (EFSF), stands at €780 billion; it quickly becomes apparent that the entirety of the EFSF would be swallowed up by an Italian debt crisis.  What's more concerning is that one of the 17 nations backing the EFSF is Italy itself which has committed €139.3 billion euros or 19.18 percent of the total as shown on this chart:

This means that Italy is basically guaranteeing its own debt through the EFSF along with that of other nations, an action it can ill afford.  Since Italy's debt is so massive when compared to the other PIIGS nations, it obviously, this means that if and when Italy appears to be headed for the fiscal woods, the ECB, IMF and other organizations or governments would have to step in to prevent the system from imploding on itself.  Unfortunately, at some point, the nations like Germany that have shown fiscal restraint will themselves be under threat by their very association with the debt transgressors, resulting in a debt default unlike anything the world has seen. 


  1. Excellent analysis, nicely laid out. So why, in your opinion, are the markets not pricing themselves or behaving as if there is this huge risk and uncertainty looming on the horizon ... or perhaps closer?

  2. I think it's because the world's central banks are dumping so much money into sovereign bonds right now, pushing prices up and yields down. All of that money they are "printing" has to go somewhere and it appears that it's into bonds.


  3. This is an excellent article. This is part of the reason why I am so concerned about the possibility of a Eurozone Depression.

    Check out Video 1 on the above link. I see the total problem for the Eurozone at $660 Bil per year, every year. Basically, this will come from France and Germany (which is impossible).

  4. We all know that it has been said that horse racing is the sport of kings, and horses were important in the old days to establish Empires, and today, I think horses are important to retain Empires.

    If I were a king, then I would only marry a woman who would love me and love my male horses, and I do not want to go into details, but that is my main human weakness, along with other things.

    I think that Empires were established and retained by only having like minded vassal kings in the Puppet Countries, because this would be the way to ensure Puppetship of the vassal Countries, but the vassal Countries would never know my habits, but I could always trust them, or blackmail them to be my Puppets.

    There are People who that King Henry the 8th had six wives, because he was looking for the type of woman.

    We should realise that those who want to work for the Shadow rulers of the West, will have to be their Puppets to receive their Secret Bank Accounts.

  5. I worry about how Italy, the US, and many western countries will handle their debt and demographic issues when the baby boomers retire. Are we getting a preview of this with Japan? To be transparent, I'm respectfully requesting a post on the topic. Thanks.

  6. I am a truly greatful that you wrote this article. It is so articulate and precise. Its rare to find an article that lays out a problem coming in the next few months.

  7. we all might as well just commit suicide

  8. Best explanation I've ever seen on this issue

  9. Debt can handle with any debt company with the suitable solution.Your article is great.I love that