Italy Becomes the New Greece

With Greece’s Prime Minister, George Papandreou, and opposition leader Antonis Samaras agreeing to form a new government, the aim being to ensure that the debt plan worked out with the European Union will be implemented, the financial world was finally able to exhale a bit. It’s seen as critical support for the threatened Euro, and indeed for the entire European Union. And yet, before the ink had dried, attention was already turning to what is a much bigger game, Italy.

Italy, like Greece and several other troubled EU members, has too much debt. However, in the case of Italy, the world’s eighth largest economy, and third biggest in the EU zone, the numbers are in a different universe. Although Italy has a lower debt-to-GDP ratio than Greece, 119% versus Greece’s 142%, the dollar amount is staggering, roughly $2.6 trillion. It’s seen as an economy that is too big to save, and yet few dispute that an Italian default would be catastrophic, and not only to the Europe. Pundits have been speculating for weeks on what an Italian default could mean, with no clear picture emerging.

In the meantime, Italy’s colorful Prime Minister, Silvio Berlusconi, is coming under increased pressure to step down, though surviving an important financial vote on Tuesday. The doubt is that the Berlusconi government would be able to put in place the austerity measures needed to save the country. On Monday, Berlusconi boosted Italy’s 10-year bonds to their highest level in 14 years, 6.67%. Italy’s bonds are widely held around the world, and a borrowing rate of 7% is seen by many as unsustainable.

There are currently 14 countries in the EU with public debt exceeding 60% of the GDP, with three of them over 100% of GDP. Greece tops the list at 142%, followed by Italy at 119%. Below 100% are Belgium, Ireland, Portugal, Germany, France, Hungary, and the UK.

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