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.