The growing debt problem faced by Italy

Yesterday saw one of the themes of this website raised by a rather unusual source. The European Commission released this document yesterday.

Today’s 27 Country Reports (for all Member States except Greece, which is under a dedicated stability support programme) provide the annual analysis of Commission staff of the situation in the Member States’ economies, including where relevant an assessment of macroeconomic imbalances.

Greece is omitted presumably because it is all to painful and embarrassing although of course one of those presenting this report Commissioner Pierre Moscovici keeps telling us it is a triumph. Reality tells us a different story as this from Macropolis illustrates.

The employment balance stayed negative in January 2017, with net departures climbing to 29,817 from 9,954 a year ago, data from the Labour Ministry’s Ergani information system revealed on Tuesday.

But as we note that 13 countries in the European Union were investigated for imbalances or just under half with 12 found to have them ( oddly the troubled Finland was excluded) the Commission found itself in an awkward spot with regards to Italy. Here is the label it gave it.

excessive economic imbalances.

Which led to this.

a report analysing the debt situation in Italy

So let us investigate.

Italy’s National Debt

Firstly we get a confession of something regularly pointed out on here.

in particular low inflation, which made the respect of the debt rule particularly demanding;

No wonder the ECB is pressing on with its QE (Quantitative Easing) program and as I pointed out only yesterday seems set to push consumer inflation above target which will help the debtors. Also in that section was something awkward as you see it is a statement of Italy’s whole period of Euro membership.

the unfavourable economic conditions,

We have an old friend returning although of course pretty much everyone has ignored it even Germany.

namely: (a) whether the ratio of the planned or actual government deficit to gross domestic product (GDP) exceeds the reference value of 3%; and (b) whether the ratio of government debt to GDP exceeds the reference value of 60%, unless it is sufficiently diminishing and approaching the reference value at a satisfactory pace.

Yep the Stability and Growth Pact is back although these days in the same way as the leaky Windscale became the leak-free Sellafield it is mostly referred to as the Fiscal Compact. The real issue here for Italy though is the debt numbers are from a universe far,far away.

Italy’s general government deficit declined to 2.6 % of GDP in 2015 (from 3% in 2014), while the debt continued to rise to 132.3% of GDP (from 131.9 % in 2014), i.e. above the 60% of GDP reference value. For 2016, Italy’s 2017 Draft Budgetary Plan7 projects the debt-to-GDP ratio to peak at 132.8%, up by 0.5 percentage points from the 2015 level. In 2017, the Draft Budgetary Plan projects a small decline (of 0.2 percentage points) in the debt-to-GDP ratio to 132.6%.

We get pages of detail which skirt many of the salient points. So let me remind them. firstly a debt-to-GDP target of 120% was established back in 2010 for Greece to avoid embarrassing Italy (and Portugal). Since then both have cruised through it which poses a question to say the least for this.

Italy conducted a sizeable fiscal adjustment between 2010 and 2013, which allowed the country to exit the excessive deficit procedure in 2013

So as soon as it could Italy returned to what we might call normal although whilst it runs fiscal deficits they are lower than the UK for example. Whilst the EU peers at them they are not really the causal vehicle here. Regular readers of my work will not be surprised to see my eyes alight on this bit.

the expected slow recovery in real GDP growth

This is the driving factor here as we note that even in better times the Italian economy only grows by around 1% a year ( 1.1% last year for example) yet in the bad times it does shrink faster than that as the -3.2% annual growth rate of the middle of 2012 illustrates. The Commission describes it like this.

Italy’s GDP has not grown compared to 15 years ago, as against average annual growth of 1.2% in the rest of the euro area.

Putting it another way the economy seems set to get back to where it was at the opening of 2012 maybe this spring but more likely this summer. In such an environment any level of borrowing will raise not only the debt level but also its ratio to GDP. Thus the pages and pages of detail on expenditure would be much better spent on looking at and then implementing economic reform.

A fiscal boost

This has come form the policies of Mario Draghi and the ECB.

taking advantage of the fiscal space created by lower interest expenditure, which declined steadily from the peak of 5.2% of GDP in 2012 to 3.9% in 2016.

Of course debt costs have lowered across the world but the ECB has contributed a fair bit to this gain of over 1% per annum in economic output. I doubt Italy’s politicians admit this as they rush to spend it and bathe themselves in the good will.

Monte dei Paschi

Another old friend so to speak but it does illustrate issues building for Italy as the Commission admits. Firstly to the debt numbers explicitly.

For instance, in 2017, both the deficit and debt figures could be revised upwards following the EUR 20 billion (or 1.2 % of GDP) banking support package earmarked by the
government in December 2016.

But also implicitly as we mull current and future economic performance.

At the current juncture, following the protracted crisis, banks are burdened by a large stock of non-performing loans and may not be able to fully support the

We left MPS itself on the 30th of December as it was socialised and in state ownership. You might reasonably think it would have been solved over the New Year break. Er no as this from the Financial Times today highlights.

Rome’s proposal to recapitalise MPS has been in limbo since December because the ECB, the bank’s supervisor, and the European Commission, which polices state aid, have different views on their responsibilities and the merits of taxpayer bailouts.

There was always going to be trouble over whether this turned out to be a bailout, a bailin or a hybrid of the two. Has any progress at all been made?

The two-month stand-off leaves fundamental questions over the rescue proposals, including the level of state support allowed, the amount of losses that creditors will suffer and the depth of restructuring needed to make the bank viable.

The creditor issue is one that resonates because ordinary Italian depositors were persuaded to buy the banks bonds in a about as clear a case of miss selling as there has been. The trouble is that the guilty party the bank’s management cannot pay on the scale required and nor can the bank inspite of it being in “optimal condition” according to Finance Minister Padoan.

Indeed some may be having nightmares about the return of a phrase that described so much economic destruction in Greece.

An Italian official said talks were on track.


This is a situation which continues to go round in circles. Europe concentrates on fiscal deficits and now apparently the national debt but ignores the main cause which is the long-term lack of economic growth. There is a particular irony that at every ECB policy press conference the Italian Mario Draghi reads out a paragraph asking for more economic reform and the place where it happens so little is his home country.

The implementation of structural reforms needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost investment, productivity and potential output growth in the euro area.

Yet when the European authorities get involved we see as in the MPS saga that they “dilly and dally” as Claudio Ranieri might say. Exactly the reverse of what they expect from the Italian government and people. The next issue for the banking sector is that for all its faults the UK for example began dealing with them in 2008 whereas Italy has looked the other way and let it drag on. That poor battered can is having to be picked up.

My suggestion would be an investigation into what is now called the unregulated economy to see how much has escaped the net. Maybe people do not want to do so because they fear that it has increased but what is there to be afraid of in the truth?

Tip TV Finance


16 thoughts on “The growing debt problem faced by Italy

  1. The EU’s elite must be dizzy just watching all of these spinning plates. There seems to be a parallel universe in operation here, where:
    1. Two months go by while MPS is caught in limbo, as arcane discussions as to whether it should be a bail-in/bail-out and which rules need to be obeyed.
    2. The only reason why the deficit is so low is because of the manipulation of the interest rates known as QE;
    3. There are rules out there (sustainable path to a 60% debt position, for example), which are clearly never going to be met by Italy;
    4. No-one even discusses whether Italy would be better off outside the Euro. After all, it has hardly prospered since it joined in 1999.
    The policy of the EU can therefore be summed up as a combination of shutting its eyes to serious issues, ignoring rules when it suits, manipulation of interest rates and thereby the bond market and a failure to examine what might be the causes of the issues.
    Not a recipe for a successful way out, in my opinion.

  2. Great interview on Tip TV, Shaun. There is really no justification for keeping housing prices out of the inflation measure, as you say. I think the best inflation measure for macroprudential purposes now is the RPI excluding mortgage interest payments and council tax with a downward adjustment in its inflation rate for the formula effect. For January 2017 it had a 2.1% inflation rate, up from 2.0% in December 2016, as compared to 2.0% for the CPIH, up from 1.8% in December. And of course, the RPI-based series is still showing too little inflation because it omits stamp duty.
    In theory, the experimental quarterly CPI-H(NA) series should be the best, which does include stamp duty and is conceptually superior. However, it really isn’t trustworthy. It shows a 0.8% annual inflation rate for 2016Q3, up from 0.6% in 2016Q2. The annual inflation rate for the RPI ex mortgage interest payments and council tax with formula effect adjustment is 1.2% for 2016Q3, up from 0.8% in 2016Q2. Not sure, why the CPI-H(NA) series is showing so little inflation, but it seems likely that the home acquisitions component has too low a weight, and it is certainly problematic that renovations are not priced, but are proxied using repairs.

    • House prices are at extreme bubble levels. When they crash it will keep inflation figures down giving Carney further reason not to raise interest rates.

      2 decades too late to add house prices imho.

    • Hi Andrew and thanks

      Are you constructing your own RPIJ these days 🙂 ? I have made the point to the authorities that their behaviour in hinting that RPIJ was the way ahead and then scrapping it was a poor effort. If there is time I will try again at the Public Meeting with the National Statistician.

      • I haven’t had to construct one yet since the series only gets cut off with the February update in March, but I will probably give it a go then. . John Pullinger said in his November 216 statement “We will continue to publish information about the formula effect and the RPI/RPIJ “wedge” so that users can understand how the difference between the Carli and Jevons formulas affects consumer price inflation measures.” From that I would take it that it would be easy to calculate what the published RPIJ should be when it is discontinued. You almost wonder what is the point of discontinuing it. The same goes for the RPI excluding mortgage interest payments and council tax. The ONS will continue to publish RPIX and the RPI council tax series, so it should be straightforward to construct RPI excluding mortgage interest payments and council tax moving forward. I do resent being forced to go through such hoops though, so I hope that you are persuasive at your meeting with Mr. Pullinger.

  3. Shaun,

    Maybe the Italian banks should copy their French counterparts with senior non preferred debt that pretends to be senior ( low yield /cheap for bank ) while subject to bail in!
    Major French banks starting issuing these once approved by Banque de France in Dec 2016 but at present only French laws allow this wheeze!

  4. I suspect the black economy is thriving in Greece too. Of course, were it to be properly sized and added to GDP, this would automatically increase their contributions to the EU’s coffers. Just like what happened when our statisticians proudly proclaimed was our true GDP when we added all of the services of UK based prostitutes, drug dealing etc.

    • Hi Hotairmail

      I am sure you are right and I would imagine that therrawbuzzin is not the only person more happy to pay for things in cash in Greece than elsewhere.

      It is in fact the income version of GDP that is used or GNI which as you say did cause some fun when we became more European statistically. From the LSE

      “An illustration of how the dry statistical methodology behind the GNI contribution can erupt into a political dispute arose in 2014 when the UK was confronted with a demand to pay an extra €2 billion euros into the EU budget. The explanation was obscure, but purely technical: some countries, notably
      Germany, had already adopted certain changes in the GNI methodology (reported colourfully, if not entirely accurately, as taking into account earnings from prostitution) while others had not, including the UK. Because the changes in question meant revisions going back a number of years and their effect was
      to raise the nominal level of UK GNI in each of these years, the UK became liable for a much larger amount than in previous such GNI adjustments. Part of the demand was for 2014, the rest a recalibration of what the UK should have paid in previous years.”

      I am not sure where he is going with the detail because prostitution was one of the additions,

  5. After an attempted burglary, an Italian Pietro decides that his 400 euro savings may not be safe under the mattress, so he goes to talk to his local unicredit branch. And he asks the manager “Is my money safe here, what happens if the mafia break in and steal everything ?” The manager replies that the head office in Milano will make it good. “Yes” says Pietro, “but what if Unicredit bankrupt ?” The manager replies that the Italian govt guarantees bank deposits. And Pietro asks “Yes, but what if the Italian govt runs out of money ?”. The manager says, “Don’t worry, we have an Italian, Mario Monti in charge of the ECB and he will make sure the ECB covers your money … Stubbornly Pietro asks but what if the ECB goes broke ? And the manager replies “Pietro, wouldn’t it be worth 400 euro to see the ECB collapse ?”

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