O problema italiano

What's Italy's problem? (Investors Chronicle), por Chris Dillow:

Looking at the deficit alone, Italy is in a decent position. The OECD estimates that its primary budget balance (which excludes interest payments) is in a surplus of 1.4 per cent of GDP, adjusting for the state of the economy. The US, by contrast, has a deficit of seven per cent of its GDP, and its 10-year yields are below three per cent. Exorbitant privilege indeed. What's more, finance minister Giulio Tremonti recently announced further deficit reduction plans which economists at Barclays Capital estimate amount to increasing the primary budget balance by 5.5 per cent of GDP by 2013.


So, if the deficit is not a problem, what is?

Four things.

First, debt is high - 119 per cent of GDP, according to Eurostat - half as much again as the UK.

Secondly, growth is low. In the last 18 years the Italian economy has grown by only 0.9 per cent a year in real terms. That's the worst performance of any major developed economy bar Japan. It means that the country has little chance of growing its way out of debt.

Some simple arithmetic shows how low growth and high debt interact nastily when real interest rates are high.

At the moment, 5.5 per cent nominal rates imply a long-term real rate of around 3.5 per cent. Combine this with a debt-GDP ratio of 119 per cent and a trend growth rate of 0.9 per cent, and the maths is nasty. Italy needs a primary budget surplus of over three per cent of GDP per year merely to stabilize its debt-GDP ratio. This implies not just a few years of austerity, but many - as many years as real interest rates stay high.

Which brings us to a third problem - that market opinion is self-fulfilling. If investors believe Italy can pay its debts, then they'll be happy to lend to the country at low rates, and it will indeed be able to pay. But if they believe the country will be unable to pay, interest rates will soar and this belief will thus be proven correct. The danger is that we are moving from the first equilibrium to the latter.

And herein lies the fourth problem. Italy is too big to save. Its debt is €1.8 trillion (£1.6 trillion) - almost five times the size of Greek government debt. But the European Financial Stability Facility has only €440bn available to lend to member states. Although there is, for now, no technical barrier to increasing the size of this facility - demand for EFSF bonds has been high - there is a political barrier; the German public, the largest underwriters of the EFSF, have no appetite for giving more support to southern Europe.