Italy, Europe’s third largest economy, is not merely facing a liquidity crisis; it is insolvent, according to Matthew Lynn, CEO of London-based consulting firm Strategy Economics. (“Italy is bust; it’s just a question of when,” MartketWatch). It is only ironic that Italy’s government debt has been stable for a decade (but at a high level) and its population is relatively wealthy, because the country faces three big problems, which, Lynn believes, are insurmountable.
First, corporate and personal debt have exploded. As of 2010, corporate debt was 128% of GDP (up from 96% in 2000) and personal debt was 53% of GDP (up from 30% in 2000). Overall debt has risen 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,” writes Lynn.
Second, Italy’s economy has been stagnant from 2000 to 2010, even as the global economy boomed up to 2008. Most of the rest of the world got wealthier. Italy has had four recessions since 1999. The next 10 years will be tougher, Lynn warns. The Italian government already pays three times more for 10-year financing than Germany, and that sets the benchmark for Italian companies. If Italian companies must pay three times more than foreign companies, how can they stay in business? “The chances are GDP will actually contract over the whole of the next ten years. That is going to make it a lot harder to pay off the debt.”
Third, the Italian population is old and shrinking. Lots of old people drawing their generous pension and welfare benefits financed by much smaller and shrinking population of young people is unsustainable.
Italy owes 1.9 trillion euros. It is insolvent. It will default, and, in Lynn’s words, “that is going to be a cataclysmic event for the world economy.”
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