Why Italy is not the next Greece
July 30, 2017
Equity markets have set their cross hairs on Italy this week, the eurozoneâ€™s third-largest economy and also one of Europeâ€™s most indebted nations, second only to Greece. But the next Greece it is not, says one economist.
The recent fears over Italy materialized as concerns grow that Italian banks will perform poorly in a series of European stress tests (the results of the tests will be released Friday). That unease is further exacerbated by the fact that Italyâ€™s debt burden, at 1.6-trillion euros, is far beyond the scope of any existing bailout funds.
But Emanuella Enenajor, economist for CIBC, points out that there are a few crucial differences that separate Italy from what she calls â€œother euro-area fiscal laggards.â€�
For instance, while countries like Greece struggle to make massive cuts and reign in bloated government budgets, Italyâ€™s budget is in relatively good shape. The country deficit was only 4.6% of its GDP in 2010. Compare that with Greece, which saw a deficit of 10%, while Ireland had a deficit of 32.4% . Italyâ€™s deficit was even lower than France, which posted a 7% gap in 2010.
On top of that, spending cuts are already well underway.
â€œItaly has already curtailed public sector wage gains, closed some tax loopholes, and divested government assets, broadly moving towards fiscal consolidation,â€� Ms. Enenajor said in a note. â€œIn 2010, Italy reduced its deficit-to-GDP ratio by nearly a percentage point.â€�
The country also has a comparatively low unemployment rate compared to other European countries. Its rate has slid below the 8% eurozone average, and has been declining in recent months. In comparison, Greeceâ€™s unemployment rate is 16% and rising, while Spainâ€™s is 21%.
Finally, Italy maintains a strong manufacturing base, one that contributes the same amount to GDP as does Germanyâ€™s manufacturing sector.
Ms. Enenajor does outline several wild card factors that put Italy at risk . For instance, Italy has 116-billion euros in debt coming due by the end of Q3, with around 316-billion euros to be refinanced over the next four quarters. That has unnerved many investors as yields have spiked in recent weeks, and refinancing costs escalate.
Of course, there is also the tenuous political situation in Italy. Prime Minister Silvio Berlusconi has wrangled with Finance Minister Giulio Tremonti over the budget recently, raising fears of political gridlock preventing a 40-billion euro austerity budget from passing through parliament.
But despite a few hiccups, Italyâ€™s fundamentals havenâ€™t been shaken, Ms. Enenajor said.
â€œA sudden breakdown of confidence, rather than an observable deterioration in fundamentals, appears to be the cause of the current contagion to Italy,â€� she said.
But that doesnâ€™t guarantee sound fundamentals alone can save Italy from market panic.
â€œEven though Italian institutions have remained relatively sound up to now, market panic can become self-fulfilling if elevated yields reduce debt sustainability or bankingsector doubts hamper wholesale funding,â€� Ms. Enenajor said.