Italy's Debt Load: How Big of a Problem is it? [ANALYSIS]VW Staff
The Euro zone crises is taking a toll in more and more European countries, month after month, and year after year. As the crises within the Spanish financial industry are slowly becoming a norm, the media has set sights on yet another European country that has been experiencing a slowdown in economic growth over the last twelve months. This country is none other than Italy, which has been facing not only economic related problems, but also political challenges.
All these compounded with the increasing rate of unemployment in the country draws us to one question, which is based on the country’s ability to sustain its increasing debt. Several reports in the media are of the opinion that Italy may be forced to follow into the footsteps of Spain, Cyprus, and Greece, which would mean, seeking relief from the European Central bank (ECB).
However, before making any conclusions, it is important to highlight the critical areas that have been a menace to Italy’s attempts in managing its debt levels.
According to, Italy has three main areas of concern, which according to his research, are likely to force the country into seeking debt relief from the European community.
Italy is experiencing increasing levels of debt versus declining Gross Domestic Product (GDP). In an attempt to counter this scenario, the government has moved to implement austerity, while the economy continues to struggle as a credit crunch looms. Furthermore, funding costs are expected to go higher, thereby putting more strain on banks.
We recently featured UniCredit SpA (BIT:UCG) (BIT:UCGR) in one of our reports, after it reported a large decline in earnings to an underwhelming 67% due to loan losses. This has prompted the bank to engage in cost cutting measures, whereby it went on to lay-off workers as restructuring begins.
Other Italian Banks exposed to the likely funding cost strain include BNP Paribas (Paris) (BNP.PA) (Toronto) (BNP.TO), which according to a recent research conducted by Deutsche Bank AG (NYSE:DB), is highly undervalued, and hence presents value for investment in Europe, and Associazione Bancaria Italiana (ABI).
Secondly, the country is experiencing a rising rate of unemployment, as demonstrated in the chart below. The rate of Unemployment stands at just shy of 11%, and Nixon predicts that it could approach 15% by the end of 2014.
The rising rate of unemployment decreases the country’s GDP by putting pressure on consumption, which in turn is replicated in production as companies try to cope with decreasing demand. This rate will further increase if the companies follow in the footsteps of Unicredit SPA, in the exercise of laying off workers to cut on costs.
However, it is unclear as to how this could affect the country in large extents, as many countries have even higher rates of unemployment.
Third, Italy has moved to increase taxes on consumption and property in a bid to consolidate its balance of payments. This, according to Nixon, is exerting more pressure on the two areas that have been badly struck by the current situation, as unemployment rate continues to rise, while banks become more strict in lending, as they pass on the high borrowing costs to their customers.
In other reports, Nomura’s political analyst Alistair Newton points to the falling popularity of Italian Prime Minister Mario Monti, compounded by domestic politics, as major drivers in Italy’s ballooning economic challenges. He then adds that the problem could be bigger than initially feared.
Italy’s Govt Bonds 2 Year Gross Yield (GBTPGR2:IND) was down 5.83% to close at 2.63300, after having dropped o.16300, whereas the Govt Bonds 10 Year Gross Yield (GBTPGR10:IND) was down 1.30% to close at 5.77100, after dropping 0.07600.
There is no doubt about Italy’s problems, but in an actual sense, the problem is nowhere near the levels experienced in Europe. As a matter of fact, the Chief Executive Officer of the Milan based Unicredit, Federico Ghizzoni, believes that there are already some signs of recovery in the country’s economy, he was quoted saying, “the turnaround in Italy is actively progressing, as seen by first half improved operating profitability.”
France which has an unemployment rate of 10% has not been labelled as a country likely to seek relief as a result of debt crises; Italy’s rate is approximately 10.7%, while the U.S is only lower by more or less 2 percentage points, at 8.3% as per the latest statistics, and seems comfortable enough to even question the need of QEIII.
So is Italy’s situation that bad? in my opinion, this is pretty relative and subjective, but it also offers a word of caution as the future remains unpredictable, due to macroeconomic factors.