Debt crisis: how did Italy get there?



Since 1992, Italian debt is close to 120%, making it one of the heaviest in the world. A large part of the resources is thus absorbed in the repayment of interest on this debt, instead of being mobilized to revive growth.

After an austerity plan voted in mid-July, Silvio Berlusconi announced Wednesday an action plan to reassure markets. But the situation of the country arouses the nervousness of the investors.

After Greece, Spain, Portugal, and Ireland, it is Italy’s turn to be in the crosshairs of the financial markets. As a result of this crisis of confidence, the Milan Stock Exchange has been wavering since the beginning of the week despite the announcement, Wednesday, August 3, of an “immediate action plan” by Prime Minister Silvio Berlusconi.

According to Clemente de Lucia, an economist for the BNP Paribas group banking group, the negative spiral started at the end of May after “the publication of the first half economic results” which “highlighted the very weak growth of Italy”. “The financial markets then put the country on negative watch, ” he says. Since then, a climate of uncertainty hangs around the third economy of the eurozone, fed by various ingredients:

The growth. Traditionally sluggish in Italy, “it has always been below the eurozone average, ” notes Clemente de Lucia. “It evolves between 1 and 1.5%, without real prospects for recovery,” says economist Jean-François James, who teaches at Sciences Po. In the case, a global economy little innovative, not very dynamic, and which suffers from times of a lack of competitiveness – expensive services, monopolies – and productivity. These weaknesses have not been resolved under the government of Silvio Berlusconi, according to the British magazine The Economist, since the head of government has “never remedied, nor even recognized” the various defects that undermine his country, as the decline in GDP per capita, unemployment among young people and women in explosion, environmental degradation or a brain drain that continues.

Political instability. It is also a factor that plunges the markets into a feeling of deleterious uncertainty. Beyond scandals of morals, Silvio Berlusconi has been weakened by political defeats, such as the losses of the cities of Milan and Naples or the defeat of his side in a referendum on nuclear.


To these national elements is added a context of “international crisis of the loan” , according to the expression of Jean-François Jamet, which widens the gaps between the so-called “virtuous” countries , like Germany, where take refuge the investors and where interest rates remain at a very low level, and the more volatile countries, which are seeing their rates go beyond the limits of the bearable. Between the two, a gray area, where you can switch at any time from one side to the other, explains the economist. Here stands Italy, in precarious balance.

Clemente de Lucia regrets that the nervousness of the financial markets, fueled by the Greek and US debt crises, exacerbated by the fear of contagion to the most fragile countries, prevents investors from looking more deeply into the economic health of the economy. Italy even pushes them to exaggerate its faults. The level of debt, while high, is still “sustainable” unlike that of Greece, because interest rates remain, for the moment, low enough to allow a gradual repayment and without outside help. In addition, the Italian banking system, conservative and not very speculative, was less affected than others by the financial crisis.


The Italian economic balance still counts positive elements. Its primary budget balance – the difference between government revenues and expenditures, not counting the payment of a debt – is positive, says James. The Italian economy has already shown resilience: after recovering from a serious financial crisis in 1992, it has better surmounted than other European neighbors the crisis of 2008. Its deficit has even fallen from 5.3 Between 4.5% and 4.5% between 2009 and 2010. The social partners have also shown a strong desire to boost growth, as shown by the singular appeal of employers and unions to a “pact for growth”.

By opting for austerity, the Italian government has had the merit of not wasting time. The austerity plan of July 15 was voted in just three days. With objectives such as payday loan consolidation and a near-balanced budget in 2014, Italy has not stopped the mistrust of markets but may have avoided a “panic” more serious, notes Jean-François Jamet.
Finally, the July 21 euro-zone summit led to the possibility for the European Financial Stability Facility (EFSF) to buy back government debt on the secondary market (a second-hand market where creditors resell acquired securities). Until now, only the ECB had the right. However, it had had to suspend this device, which puts the bank in close contact with the sovereign interests and thus presents a risk for its independence. In the meantime, it will be necessary to wait until the beginning of the school year at least for the change of status of the EFSF to be ratified by the parliaments. Too long, obviously, for this measure to be taken into account today by the markets, which are navigating at an even faster pace.


If it fails to act quickly, what is the risk of Italy? The worst-case scenario would be an escalation in interest rates on its loans, to the point where it is in default, ie unable to repay its debt. A threat that can not be ruled out, when one thinks of the “self-fulfilling” power of the financial investors’ forecasts: the more the latter lose confidence, the more they sell their securities for fear of never being reimbursed, the higher the interest rates increase, and with them the debt. A question of “market psychology” more than real economic problems, considers Mr. Jamet.

Admittedly, Brussels announced that a bailout for Italy was not under discussion. However, in view of this outcome, it will be much more difficult to retrieve the boot than Greece, or even Portugal and Ireland. Because the peninsula “alone weighs more than twice as much as these three countries saved to date,” says AFP. For Mr de Lucia, the EFSF will not be enough to support Italy, unless it is bailed out. A perspective to which Germany opposes. As for the European states, they would not be able to raise the necessary amounts without having recourse to the financial markets, adds Jean-François Jamet. The crisis would, therefore, take on an even greater scale. To the point that, for the Italian daily La Stampa, the fall of Italy would inevitably lead to the fall of the euro (article translated in the International Mail ).