The Prodigal Greek

The Greek crisis through a different prism

Debito inferno

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Italy is a ticking bomb and has the potential to make the Greek debt crisis seem like a walk in the park.

According to Eurostat, Italy’s debt in 2010 stood at EUR1.842trl, 118% of the country’s domestic product, historically representing approximately a quarter of the total debt of the euroarea. In nominal terms, only Germany has a bigger debt outstanding, for Germany it stands at 83% of the country’s GDP.

Italy’s interest payments in 2010 were EUR68.4bln. In recent years, debt servicing represents between 10%-11% of the general government’s revenues and in the region of 9%-10% of the overall general government expenditure.

2010’s interest payments of EUR68.4bln imply a yield of 3.7% of the gross debt, reflecting the relatively low costs that Italy enjoyed in issuing new or refinancing existing debt.

All this until recently. Since the beginning of the summer, Italy’s yields and spreads started heading upwards and it is only because of the intervention of the ECB that they temporarily recovered.

Today, Italian 10 year sovereign debt trades at a yield above 6% and the spread stands at 380 basis points, close to the levels that triggered ECB’s intervention at the begining of August.

Italy 10 year Bid Yield

Italy 10 year Benchmark Spread

Last Friday, at a disappointing debt auction, Italy met lower demand for its EUR7.94bln sale and paid the highest premium to sell 10 year debt since the country joined the single curency, at 6.06%.

And this is when it starts getting really scary.

According to data from Thomson Reuters, by 2015 Italy will need to refinance EUR725bln of debt, almost 40% of the outstanding amount.

Next year, the refinancing needs are EUR312bln.  Add to this the country’s deficit and, in 2012 alone, Italy could be asking the markets for an amount equal to the ENTIRE Greek debt.

More than half of the 2012 expiring issues, approximately EUR162bln, mature by the end of April when the market sentiment is expected to be far from settled.

The majority of the issues that expire in 2012 have yields in the region of 3%-3.5% and if the last auction is anything to go by, it is pretty unlikely that Italy will find such favourable financing terms.

Comparing with the previously mentioned 3.7% implied yield, and combining with the significant amount that will need to be refinanced, Italy will see its interest payments creeping up, reaching pre euro levels of above 15% of the general government’s revenues, fuelling the debt/deficit fire out of control.

Add to this the country’s historical political fragility of coalitions, unstable current government and a Prime Minister whose main asset is his sense of humour and you can understand why Greece will soon become old news in this eurozone debt drama.

At the moment there is nothing to suggest that market financing will remain open for Italy for much longer. European leaders better be prepared for a flaming potato of EUR1.8trl that is coming  their way.


Written by Yiannis Mouzakis

October 31, 2011 at 1:09 pm

Posted in Economico

Tagged with , , , ,

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