“When a man has survived so many corruption scandals, financial or sexual as Silvio Berlusconi did in the last two decades of politics, it would be a mistake to assume that a small problem as his country’s imminent bankruptcy would be more than a small setback in his career”, writes Matthew Lynn – CEO of the consulting firm London Economics Strategy – in an editorial published in MarketWatch. And although Prime Minister is on the brink of leaving the Italian politics, it does not really matter who will be in charge of Italy. “The country is bankrupt, and the markets reacted to it. The only problem is when it will happen”, comments Lynn.
According to him, the only remarkable thing about Italy is that it took so long to become the epicenter of the crisis in the euro area. Discussions on the Italian situation led to a dramatic increase in the cost of loans for bonds with maturity of 10 years, they increased from 5.6% to 6.7% in one month. Italy is currently facing three major problems.
Firstly, although government debt has been relatively stable over the past ten years, any other type of debt exploded. Thus, corporate debt rose from 96% to 128% of GDP between 2000 and 2010. Individual debt rose from 30% to 53% of GDP over the same period. The total debt rose from 252% of GDP to 310% of GDP since the entry of Italy in the euro area.
Also, the Italian economy ceased to grow, passing through four recessions since the entry into the euro area in 1999. The average increase was 0.6% between 2000 and 2010. GDP growth per capita rose by only 0.1%. And what is to come over Italy will be more difficult. There are chances that the GDP will shrink in the next 10 years.
Finally, Italy has a demographic problem. According to UN, population will fall by 2050 from 51 million to 41 million. This, together with increased life expectancy will strike hard the labor market, affecting strongly the government finances.
“There is no way the country remains solvent. It already pays nearly three times more than Germany for 10-year bonds”, says Lynn. “Italy could be in bankruptcy this year, next year or in two years. In the end, time does not make a big difference. It is not facing a liquidity crisis and the rest of the euro area is either unable or not willing to spend money to save Italy. It is insolvent and, with 1,900 billion additional debt, it will be a cataclysmic event for the world economy.