Can Italy escape the burden of her national debt which is not only large but rising?

Only on Friday I took a look at Spain’s situation and compared the situation in her apparently healthy financial markets with the obviously unhealthy real economy. Today I wish to take a look to the East of her and examine the state of play in Italy where there are similarities but also many important differences. It is a feature of the Euro area crisis ignored by the mainstream media that the countries in trouble are there for a variety of reasons.

Italy and her financial markets

Government Bonds

First we note that Italy has a ten-year government bond yield which at 4.18% as I type this is a fair bit lower than Spain’s. We also see that in 2012 it fell heavily as it started the year at 6.6% and is now nearly 2.5% lower. However to be more specific it first fell then returned to to 6.6% area in late July and then fell. So she finds itself in a much stronger situation now.

If we move to shorter dated bond yields we now see something that looks positively healthy on a first look. As the two-year yield is now 1.41% which is down on the just over 4% of the opening of 2012 and considerably down on the over 5% peak of late July 2012. Unfortunately we have to remind ourselves that such apparent health is being bolstered by the Outright Monetary Transactions promises of the European Central Bank.

Stock Market

The Italian stock market has joined in the surge that has accompanied the start of 2013 as it is up some 8.3% already in 2013 if we use the FTSE:MIB index as our measure. It is now at 17,633 up considerably (16%) on the 15,200 or so with which it greeted 2012. Indeed investors who were brave enough to invest in the latter part of July should be smiling right now as around 40% has been gained in a powerful surge since then.

So if we review Italy’s financial markets we see that her position as measured by them has improved considerably since the beginning of 2012 which contrasts with the situation in Spain where they have run a cycle and followed the advice of Elvis

Return to sender

For Italy I would add a note of caution if you feel that the numbers above remind you of a Supertramp album.

Crisis what crisis?

A lot of intervention some actual and some promised has gone into those numbers!

The Euro itself

Movements in this tend to escape the news headlines when it is rising or to be more specific move to the politics section where various Euro area leaders can be found boasting about it! However the Euro rally has move on even since Friday as it is now at 1.337 versus the US Dollar and at one point earlier today rose briefly to 120 Yen against the Japanese currency which is currently proving the never try to catch a falling piano dictum! The Euro has risen to 1.206 versus the UK pound too.

However if we move from political fantasies to reality this must be making life even harder for Euro area exporters such as in Italy. After all many of these countries are on programmes which as supposed to make them more economically competitive via what has become called by its (shrinking band of) supporters internal devaluation. What we actually see is economic weakness which in some places is now a collapse in return for some relatively minor competitiveness gains that are now being offset by currency strength. Sometimes you really couldn’t make it up!

What about the real economy?

If we go back to November 19th of last year I pointed out this.

In the third quarter of 2012 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.2 per cent with respect to the second quarter of 2012 and by 2.4 per cent in comparison with the third quarter of 2011.

So weak but some pointed out that as it was better than the second quarter there could be a turn. How is that going?

Industrial Production

This morning Italy’s statistics office has told us this.

In November 2012 the industrial production index seasonally adjusted decreased by 1.0% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was -1.7%.

So still falling albeit at a slightly lower rate. But in my opinion we also need to look further back for a proper perspective on the situation.

The calendar adjusted industrial production index decreased by 7.6% compared with November 2011

This rate has in fact increased on the average for the year up to then which is 6.6%. We can also peruse the underlying index to gain some further insight we see that it at 80.8 compared to 2005′s base of 100 shows the depth of the problem. I looked back to what the number was when I discussed Italy on the 19th of November last year and the reading then (for September) was 83.0.

So industrial production in Italy continues to weaken and if we look at the rise in the Euro we are faced with the prospect of future export levels coming under financial pressure.

House prices are falling too

Some of Italy’s Euro area colleagues have had booms followed by a bust in this area. She has had a calmer pattern but we are now seeing some weakness there too.

the House Price Index (see Italian IPAB) decreased by 1,1% compared to the previous quarter and by 3,2% in comparison to the same quarter of the previous year

The actual index is at 98 but as the base is 2010 we learn less than we might from it but I intend to keep an eye on it as it looks as though we saw a turn downwards in the autumn of 2011. Why does this matter? It will impact on the construction sector and the banks. We find ourselves returning to my dichotomy theme as these are of course the same banks which are seeing their share prices surge right now. For example Unicredit which I described on the Jeff Randall Show as being like a member of the undead (kept alive on life support..) has a share price up 48% on a year ago.  Remind me again, what do falling house prices and weak economies do to banks loan books?

Looking forwards

Whilst many look at unemployment numbers I feel that there is more insight to be gained from employment numbers. Firstly you have more influence on them and they also have become a useful guide to what happens next in the credit crunch era. If we look at November in Italy we see that employment fell by 42,000  which meant that it was 37,000 ower than a year before.

If we move to the business surveys we see more bad news. Italy’s service sector did this in December according to Markit.

Output across Italy’s service sector continued to decrease at a relatively marked pace in December, which data suggested was in part due to a loss of new work.

Somewhat ominously we also saw this.

Employment levels were cut again

Tucked away in the report was a very grim message and the emphasis is mine.

Confidence was down slightly since November, and close to the lowest seen since the start of data collection


 As we examine Italy’s economic position we see that it shares with Spain an improvement in the apparent regard for her by financial markets. Indeed we see that Italy has strengthened by more than Spain in this regard. However as we move to her actual economic situation we see that problems are building for her. It is quite plain that her economy is shrinking and that there is no end immediately in sight to this.

The Italian problem of a high national debt is also now one of a high and rising national debt. The economic weakness has meant that she is running fiscal deficits -for newer readers Italy has had her fiscal deficit under better control than many- and her national debt is now 2.021 trillion Euro as of November. We also know that her national debt to economic output level is around 128% as opposed to the IMF/troika threshold which is supposedly 120%. Ooops! We also know that this is going to get worse. For example she had paid 23 billion Euros into the various Euro area rescue programmes in 2012 up to then and more will be needed in an example of my unstable lifeboat theme.

So Italy is now between a rock (her large national debt) and a hard place (her shrinking economy) and it is hard to see a way out. However she does have strengths as her private-sector has savings and there is the possibility of also deploying some of her black market economy to help. Some progress has been made as tax revenue is up 3.1% in the year to November but she needs more. Otherwise financial markets will lurch from complacency to crisis one more time.

This entry was posted in Banks, Euro zone Crisis, General Economics, Quantitative Easing and Extraordinary Monetary Measures, Recession, Yield and tagged , , . Bookmark the permalink.
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  • Rods

    Hi Shaun,

    Another good piece of analysis.

    At some point economic reality in Southern Europe is going to be tested against the Trokia promises. It still looks like there are going to be some interesting times in 2013.

    Anyway according to Barosso none of the problems in the Eurozone periphery has anything to do with the EU or the Euro it is all the national Governments fault. It is good to know that setting Euro interest rates to suit firstly Germany has no effect of the rest of the Eurozone then. Your right sometimes you couldn’t make it up!

  • Pavlaki

    The ECB (and now the IMF) are doing a great job of talking down the bond markets ( G. Osborne and the B of E take note ) but little else. What I cannot understand is why the ECB is not more pro active in getting the Euro down? Are they totally cowed by German demands?

  • mike

    Can UK escape the burden of her national debt is the question most affecting us surely. The answer is NO we can’t we’re in deep trouble. But hey ho into the ftse and onwards ever upwards.

  • James

    Great article Shaun, but I think that the answer to your question (Can Italy escape its debt burden) is quite simply “NO”.
    It has the familiar choices ahead of it:
    1. Kick the can down the road
    2. Austerity measures
    3. Unlimited support from the ECB
    4. Lots of hot air from politicians
    But, can it either:
    1. Ever pay the debt back
    2. Cut its deficit without the usual agonies of mass unemployment, riots etc etc a la Greece?
    I don’t think so.

  • forbin

    Hello Shaun,

    In the” ideal world” Italy would be sunk for sure but being “bad” in an increasingly getter worse world perhaps she is not so “bad” after all

    I mean , look around , the UK , France and the USA aint exactly investment oppurtunities are they ? Money is hanging on waiting for that moment they can get a Great return, whereas the real world its looking like you’re lucky to get your money back – yet alone a return! ( ECB please take note ! )

    ah this is going to be an interesting year to watch I think


    ( popcorn – yum! )

  • DaveS

    It can try and inflate the debt away – if the ECB or rather Germany lets it.

    Thats what UK and US are doing.

    But inflating debt away means real losses for creditors – strangely Germany is the only major creditor nation in the West. They also have a folk memory of hyper-inflation. So good reasons for them to resist.

    Ultimately they will give in and inflate with the rest of them. If its a race to the bottom then Germany will have to join it or Euro strength might kill the German goose that laid the German golden egg – exports. Besides they will face open revolt from just about every other Euro “partner”.

    Thats the end game – inflation.

  • Midge

    Like you Shaun have enjoyed great holidays in Italy on the Amalfi Coast and in Tuscany.For the tourist the country has much to offer but these figures are dire,Like others,despite rhetoric from politicians I believe something major will happen in Europe maybe this year.CNBC reports that Greece has accepted more cuts resulting no doubt to further job losses and raised price of electricity by as much as 15%.How much longer can this go on for?

  • Anonymous

    Hi Rods
    Thank you. As to the numbers they were backed up by industrial production figures for the Euro area as a whole which we down 3.7% in November 2012 on the same month as year before. So there is trouble ahead.
    President Barosso is often much more circumspect when discussing his home country. Did anybody ask if the national governments at fault included Portugals?

  • Anonymous

    Hi Pavlaki
    Or are they too sucked in by the rhetoric? You could argue they are looking for an anti-inflationary effect from the rise against the US Dollar but then they would have to explain to us where they expect the inflation to come from! :)
    The Yen issue may have caught the ECB off-guard a little but it is near to pushing through 1.20 versus £ too.

  • Anonymous

    Hi Mike and welcome to my blog.

    We are indeed in trouble although on the national debt scale we are behind Italy as we are at 85.8% of GDP on the same basis. So a fair way to go although we have much more of a current issue with out annual deficit.
    If it helps stock market rallied like this are called climbing a “wall of worry”.

  • Anonymous

    Hi Forbin
    If one looks at the traditional investment markets we see, cash affected by ZIRP, bonds mostly being expensive sometimes very expensive and now equities look expensive too. No wonder money sometimes goes elsewhere…

  • Anonymous

    Hi Midge

    I am starting to fear the worst. I know that Marie Antoinette never actualy uttered the words “Let them eat cake” but much more recent pronouncements seem to be in that spirit.

  • Anonymous

    Hi Shaun,

    In 1984 in New Zealand, the newly elected labour finance minister Roger Douglas surprised voters when he announced the economy was in real trouble and needed deregulation and an end to farm subsidies. He launched “Rogernomics” with many privatisations – similar to Thatchers revolution. This was done with the threat of a currency collapse due to excess spending and borrowing.

    I note that Japan, the USA and the EU also spend large sums on farm subsidies.
    In Europe the lion’s share of subsidy goes to very wealthy landowners. Worse still, it punishes European consumers with higher food bills caused by protectionism.

    I suggest that Europe’s road back to economic health will require the end to harmful subsidies – both bank subsidies and farm subsidies cause much hurt.

    Is your dichotomy a surprise when productive businesses suffer 50%+ tax to fund unproductive subsidies for failing banks,overpaid eurocrats and hereditary landowners ? Our high taxation is a gross misdirection of resources.