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The price of insuring Italian sovereign bonds against default risk has soared 11% since the weekend, when the European Union finally gave [[Greece]] the cash to make its July debt payments. [[Standard & Poor's]] warned that Greece could technically be considered in default. Faced with such a scenario, traders have already turned a cold eye to the other fragile economies of the euro zone: [[Portugal]], [[Spain]], Italy. The cost of insuring Spanish and Portuguese bonds surged 3% as of July, 2011, and credit default swap spreads on Italian debt, which was previously seen as relatively insulated, soared a full 6.7%.<ref name="Emerging_sink">Emerging Money. [http://community.nasdaq.com/News/2011-07/italian-spanish-banks-sink-in-euro-credit-market-storm.aspx?storyid=83871 "Italian, Spanish banks sink in euro credit market storm"], posted 7/5/2011. Referenced 2011-07-12.</ref>
The price of insuring Italian sovereign bonds against default risk has soared 11% since the weekend, when the European Union finally gave [[Greece]] the cash to make its July debt payments. [[Standard & Poor's]] warned that Greece could technically be considered in default. Faced with such a scenario, traders have already turned a cold eye to the other fragile economies of the euro zone: [[Portugal]], [[Spain]], Italy. The cost of insuring Spanish and Portuguese bonds surged 3% as of July, 2011, and credit default swap spreads on Italian debt, which was previously seen as relatively insulated, soared a full 6.7%.<ref name="Emerging_sink">Emerging Money. [http://community.nasdaq.com/News/2011-07/italian-spanish-banks-sink-in-euro-credit-market-storm.aspx?storyid=83871 "Italian, Spanish banks sink in euro credit market storm"], posted 7/5/2011. Referenced 2011-07-12.</ref>
European banks have total claims and potential exposures of $998.7 billion to Italy, more than six times the $162.4 billion exposure they have to Greece, according to Barclays Capital. European banks have $774 billion of exposure to Spain and $532 billion of exposure to Ireland.
In the United States, banks are also more exposed to Italy than to any other euro zone country, to the tune of $269 billion, according to Barclays. American banks’ next biggest exposure is to Spain, with total claims estimated at $179 billion.<ref name="Alderman_Contagion">Liz Alderman and Rachel Donadio. [http://www.nytimes.com/2011/07/12/business/global/italy-evolves-into-eus-next-weak-link.html "Debt Contagion Threatens Italy"], ''New York Times'', Published: July 11, 2011. Referenced 2011-07-19.</ref>


==References==
==References==

Revision as of 14:00, 19 July 2011

Country summary

Capital

Rome

Borders

Austria 430 km, France 488 km, Holy See (Vatican City) 3.2 km, San Marino 39 km, Slovenia 199 km, Switzerland 740 km

Government type

republic

Population

58,126,212 (July 2010 est.)[1]

Population growth %

-0.05 (2010 est.)[1]

Life expectancy

80.2 years[1]

Unemployment

7.7% (2009 est.)[1]

Index of Economic Freedom

74[2]

Corruption Perceptions Index

63[3]

Doing Business ranking

78[4]


Italy became a nation-state in 1861 when the regional states of the peninsula, along with Sardinia and Sicily, were united under King Victor EMMANUEL II. An era of parliamentary government came to a close in the early 1920s when Benito MUSSOLINI established a Fascist dictatorship. His alliance with Nazi Germany led to Italy's defeat in World War II. A democratic republic replaced the monarchy in 1946 and economic revival followed. Italy was a charter member of NATO and the European Economic Community (EEC). It has been at the forefront of European economic and political unification, joining the Economic and Monetary Union in 1999. Persistent problems include illegal immigration, organized crime, corruption, high unemployment, sluggish economic growth, and the low incomes and technical standards of southern Italy compared with the prosperous north.[1]

Economical characteristics

  • Currency: Euro (ISO code: EUR)
  • Central bank discount rate: 3% (31 December 2008)[1]
  • Commercial banks lending rate: 11.34% (31 December 2008)[1]
  • is part of the Eurozone
See also: Panic of 1866

Statistics

Statistic / Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
GDP (million USD)[5] 1 200 820 1 097 340 1 117 360 1 218 920 1 507 170 1 727 750 1 777 740 1 863 480 2 114 470 2 303 080
Govt. debt (% of GDP)[6] 124.544 119.389 118.521 115.771 111.353 111.128 112.576 108.443 103.933 106.321
Govt. revenue (% of GDP)[7] 39.125 37.159 36.867 36.183 36.167 35.675 35.356 36.889 37.601 37.490
Govt. expenses (% of GDP)[8] 40.449 39.176 39.913 39.254 39.518 38.659 39.169 39.599 39.365 40.142
Debt to revenue (years) 3.183 3.213 3.215 3.200 3.079 3.115 3.184 2.940 2.764 2.836


Italy in the European crisis

Main article: European sovereign debt crisis (2010–present)

According to International Monetary Fund projections, Italy's headline debt will reach 120 percent of national output in 2011, and then decline only slightly to 118 percent by the end of 2016. As of July, 2011, Italian bonds yielded about 4.9 percent, with the spread over German bonds widening to about two full percentage points (in contrast, the Greek-German spread is now about 13 percentage points). Further increases in interest rates could push the forecasts for Italy's debt toward Greek levels.

Bailing out makes sense for smaller countries like Greece. It has about 360 billion euros in debt outstanding and the potential credit losses in any restructuring are in the range of 100 billion to 200 billion euros. The amounts are small relative to the EU's 12 trillion-euro economy.

Italy, though, has close to 2 trillion euros in debt outstanding. It's inconceivable that Germany or the IMF could provide a rescue to protect its creditors. Such a package would have to involve loans and guarantees of at least 500 billion, and possibly 1 trillion, euros to impress the markets. This would be a significant fraction of Germany's gross domestic product of about 2.5 trillion euros. With a debt-to-GDP ratio of about 80 percent, Germany's ability to take on new debt is limited.

The Netherlands, Finland and Austria, combined with Germany, have a GDP of about 3.5 trillion euros. France adds 2 trillion more, but its debt, already 85 percent of output, is expected to grow over the next several years.

Europe does not have enough fiscal firepower to handle an Italian crisis -- at least in such a way as to protect creditors completely. Beyond the difficult numbers, why would Germany or other EU countries lend to Italy, particularly when its politicians show no sign of coming to grips with their new reality?

Italian banks will be able to draw on substantial credit from the European Central Bank, especially once Mario Draghi, former head of the Bank of Italy, becomes the ECB president in November, 2011. But the entire euro system -- the ECB plus the 17 central banks sharing the euro -- has a combined balance sheet of only about 1.9 trillion euros. It's unlikely that ECB credit can do more than postpone sovereign-debt problems on an Italian scale.[9]

The price of insuring Italian sovereign bonds against default risk has soared 11% since the weekend, when the European Union finally gave Greece the cash to make its July debt payments. Standard & Poor's warned that Greece could technically be considered in default. Faced with such a scenario, traders have already turned a cold eye to the other fragile economies of the euro zone: Portugal, Spain, Italy. The cost of insuring Spanish and Portuguese bonds surged 3% as of July, 2011, and credit default swap spreads on Italian debt, which was previously seen as relatively insulated, soared a full 6.7%.[10]

European banks have total claims and potential exposures of $998.7 billion to Italy, more than six times the $162.4 billion exposure they have to Greece, according to Barclays Capital. European banks have $774 billion of exposure to Spain and $532 billion of exposure to Ireland.

In the United States, banks are also more exposed to Italy than to any other euro zone country, to the tune of $269 billion, according to Barclays. American banks’ next biggest exposure is to Spain, with total claims estimated at $179 billion.[11]

References

Note: statistical data was rounded. Different sources may use different methodologies for their estimates. Debt to revenue is calculated by dividing the two variables from their original ('unrounded') values. It represents how long it would a government take to repay its entire debt if it used its whole revenue for this purpose.

  1. ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 CIA - The World Factbook. "Italy", from The World Factbook. Referenced 2010-09-21.
  2. ↑ Heritage Foundation. "Italy", Economic Freedom Score. A lower ranking is better; but please be careful when comparing between different countries or years. Referenced 2010-09-21.
  3. ↑ Transparency International. "Italy", Corruption Perceptions Index 2009. A lower ranking is better; but please note that the numbers cannot be compared between countries or years due to different methodology. Referenced 2010-09-21.
  4. ↑ Doing Business. "Italy", Doing Business 2010 (part of The World Bank Group). A lower ranking is better; but please be careful when comparing between different countries or years. Referenced 2010-09-21.
  5. ↑ World Bank. "Italy: GDP", from World Bank Data. Referenced 2010-09-21.
  6. ↑ World Bank. "Italy: government debt", from World Bank Data. Referenced 2010-09-21.
  7. ↑ World Bank. "Italy: government revenue", from World Bank Data. Referenced 2010-09-21.
  8. ↑ World Bank. "Italy: government expenses", from World Bank Data. Referenced 2010-09-21.
  9. ↑ Simon Johnson. "Could Italy Be the Next European Domino?", San Francisco Chronicle, The Chronicle with Bloomberg, July 4, 2011. Referenced 2011-07-12.
  10. ↑ Emerging Money. "Italian, Spanish banks sink in euro credit market storm", posted 7/5/2011. Referenced 2011-07-12.
  11. ↑ Liz Alderman and Rachel Donadio. "Debt Contagion Threatens Italy", New York Times, Published: July 11, 2011. Referenced 2011-07-19.

Links

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