How Italy’s budget woes could escalate
October 25, 2018 -- Brussels has rejected Italy’s 2019 budget, setting its governing coalition on a collision course with the commission. Rome has three weeks to submit a new spending plan or face millions of euros in fines.
Writing in the New York Times, Jack Ewing, an economics and monetary policy expert, warns of dire consequences when interest rates spike and investors lose confidence in a country’s ability to pay its debts.
Last week, Moody’s Investors Service downgraded its rating of Italian debt to one notch above the level where it would no longer be considered investment grade — in plain language, “junk.”
If the tension between Italy’s populist government and the European Commission continues, there is a good chance that Standard & Poor’s will follow Moody’s lead, putting pressure on the other two leading rating agencies -- Fitch and DBRS -- to do the same, pushing Rome over the cliff to the junk abyss.
Between 2000 and 2008 Italy’s government debt has hovered between 100 per cent and 110 per cent of GDP, but since the financial and eurozone crises it has surged to €2.3 trillion – above 131 per cent, making Italy the second-most indebted country in the eurozone after Greece.
However, as Carmen Reinhart, an American economist at Harvard Kennedy School, points out, the official Italian debt numbers do not include the Bank of Italy’s debtor position of almost €500 billion in the European Central Bank’s Target 2 accounts. Bank of Italy’s Target2 cross-border debt owed to the ECB hit €492.5bn in August, pushing total debt to €2.8 trillion or 160% of GDP -- taking that ratio to its highest level in over 100 years.