Italian Prime Minister Silvio Berlusconi has provided us all with some deliciously scandalous and eye-raising headlines over the past two decades, but given the current state of affairs, is he really good for much else? Could Berlusconi be entirely replaceable? Many seem to think he is.
Italy is well on its way to upstaging Greece's debt crisis. Italy, which owns 1.9 trillion euros in debt, or 129% of its GDP, is in trouble no matter who is running the show. Global investors have awakened to the idea that Italy's market is dangerous, and Berlusconi's agreement to step down did little to quell the growing fears about its debt problems.
"Yields on Italian 10-year bonds traded as high as 7.48%, rising above the key 7% level and marking its highest since the euro was launched in 1999," reports CNN money. "The 7% level is significant because that was the mark Ireland and Portugal crossed shortly before receiving bailouts from the European Union and International Monetary Fund."
Matthew Lynn, chief executive of Strategy Economics reported on Market Watch that Italy faces three big problems, little of which can be impacted by Berlusconi's position of power:
First, although government debt has been fairly stable, corporate debt has gone up from 96% to 128% of GDP between 2000 and 2010, personal debt is up from 30% to 53% of GDP over the same period. Overall debt has gone up from 252% of GDP to 310% since Italy joined the euro. “It is a mistake to focus just on government debt. It is the money the country as a whole owes that really counts.”
Next, Italy has stopped growing. It has been through four recessions since it joined the euro in 1999. Average growth has been just 0.6% from 2000-2010. Per capita GDP growth has been 0.1% over the whole of the first decade of the single currency — a statistically insignificant figure. Meanwhile, the global economy was booming through the first eight years of that decade. Just about everyone else in the world was getting richer while Italy stayed still. “The chances are GDP will actually contract over the whole of the next 10 years. That is going to make it a lot harder to pay off all the debt. “
Lastly, Italy has the worst demographics in the world. The United Nations projects that the population will fall to 41 million by 2050 from its current 51 million. And life expectancy is rising fast. As the years go forward, there are going to be lots of old people and not many young ones. That would put severe strain on the finances of any government. In a country that already has a debt crisis, and a generous pensions and welfare system, it is catastrophic.
Bigger than Berlusconi
Silvio Berlusconi's position as Prime Minister has done little to curb these issues in the past, and now in the face of overwhelming economic difficulties, who's to say he can do differently?
This is not to suggest leadership issues are the chief cause of Italy's economic crisis, nor that new leadership is the cure, simply that the problems have become bigger than Berlusconi.
"The main hope of the markets now appears to be that a technocratic government will come in to push through the kind of hard structural reforms that Italy needs," writes Lynn, but this alone will not be enough to save it.
Of course, while Berlusconi's reign may be over, actually replacing him will be no easy task. "The real danger is that the country will drift rudderless and without proper leadership for weeks if not months while politicians negotiate the future course," said Eoin Ryan, analyst at economic research firm IHS Global. (via CNN Money)
Want to keep an eye on developments in Italy? To help you monitor the situation, we've compiled a list of the five Italian stocks trading on U.S. markets.
We've sorted the list by performance over the last month.
(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA)
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