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.
Claudio Rosmino, euronews: “You recently stated that Italy is too big to fail but also too big to be saved and that if Italy does not get over the crisis, the euro will face a hard time. What is your view of Italy’s economy? Is there a risk of default?”
Alberto Alesìna: “No, I do not think there is an immediate risk, certainly not. But I think that the Italian economy does need a strong wave of reforms to start growing again. If it doesn’t, we will carry this debt forward for years and we risk remaining in this crisis and facing a new one in the months or years to come.”
euronews: “What do you think about the budget plan recently passed by the Berlusconi government? Will it be enough to re-energise the country, given its high debt?”
Alberto Alesìna: “It is definitely not enough to do that because it includes few things linked to the structural reforms that facilitate growth. Talking about the budget, the main problem is that this plan is too forward-looking, to 2013-2014, and this is a problem because it gives a signal of delay to the markets.
“What is more, in 2013, there will be general elections in Italy, with a very uncertain outcome. No one knows who will win this election, so we don’t know whether and how this plan will be implemented by the next government, which could be politically different from the current one.
“The third weakness is that it is unbalanced: too much focus on taxes and not enough on reducing spending.”
euronews: “After Black Monday on Milan’s Stock Exchange, the markets have recovered a bit. Did they reject the plan or was it, let’s say, a “natural” reaction?”
Alberto Alesìna: “The uncertainty is so strong these days that it is very hard to tell what markets want to do or say. I do believe the markets were not excited about the budget plan for the reasons I mentioned earlier.
“The obsession with speculators and the ratings agencies often hides the structural problems of various countries. To give you an example: the speculators don’t seem to attack the German markets, but they focus instead on other countries with more serious problems.”
euronews: “How are the effects of the crisis different in Italy compared to other countries such as Greece, Spain and Portugal?”
Alberto Alesìna: “Italy is suffering from different kinds of problems to Spain, Ireland and Greece: a stagnant economy that has not grown for 15 years, public debt which was already very high before the crisis, which has risen with the crisis. It is an economy which is not growing at all.”