For a while now there has been a new player in the euro debt crisis: Italy.
The country suddenly appeared on the radar screen of the bond markets. But, for many experts, that was no surprise, as Italy’s debt is chronic. Right now, it amounts to 1,840 billion euros.
What was surprising, however, was the rapid reaction of the Italian government. It came up with a tough austerity package, even earning applause from German Chancellor Angela Merkel. The fever on the bond markets cooled down. But the problem is far from over.
Next week, Italy needs to sell 10 billion euros worth of bonds. If yields rise too high, then euro zone leaders will have a big problem.
Italy: the next euro crisis domino?
Italy is the big one - so far – in terms of worries about euro zone countries not being able to repay the money they have borrowed.
The country’s scandal plagued prime minister, Silvio Berlusconi, seems to have sparked the recent problems in terms of selling Italy’s bonds.
The markets were unnerved by his falling out with finance minister Giulio Tremonti – the man behind an austerity plan that Italy’s business leaders hope will put the country back on track.
Calo Sangalli, Chairman of ConfCommercio – the Italian Confederation of Commerce, Tourism and Services – said: “There has to be renewed confidence with concrete actions and certainty for citizens. We need the politicians – Parliament and the government – to put in place effective measures to make the economy grow.”
Italy’s economic growth can best be described as tepid. It is forecast to be 1.1 percent this year rising to 1.3 percent next year.
Its gross debt to GDP ratio is very large at 120 percent, predicted to slip slightly next year to 119.4 percent.
The Italian government recently trimmed its forecasts for growth, which has lagged behind the euro zone average for over a decade.
The weak growth prospects and high debt levels are why credit rating agencies have cut their outlooks for Italy.
And when a big member of the euro club is under pressure the currency itself suffers. Paul Mackel, Senior Forex Strategist with HSBC, said: “Now we’re at the point where contagion (in euro zone) is very much alive and kicking and the markets are very much focused on what’s going on in Italy in particular and this is one of the reasons, one of the key reasons why the euro is under downward pressure more recently.”
For now, Rome must wait and hope.
Economists do not think the crisis will reach Italy, but say if it does spread to Spain - which is considered to be too big to be bailed out – then Italian banks will be put in a very perilous position as they have major exposure to Spanish government debt.
Not wishing to be caught up in that domino effect, many investors are spurning Italian bonds and shares, creating fears of a downward spiral.
To analyse the crisis affecting Italy’s economy, euronews spoke to Professor Alberto Alesìna of Harvard University in the United States.