Italy latest target of ‘spooked’ Euro investors

Italy traditionally survives periods of chaos and mismanagement. But the latest twist in the Eurozone debt saga sees this major nation vulnerable to investor flight.

The premier and his finance minister are calling each other names. The bond markets have taken fright and are forcing steeper charges for borrowing. And there's growing concern the banks will fail new tests on how robustly they are protected against crises.

No, we're not talking about Greece, which has been buffeted by economic troubles for many months. Italy is the latest European country to find itself vulnerable to the debt crisis threatening the Eurozone.

Italy has the second biggest per capita debt in the Eurozone after Greece, at 110% of GDP, and the cost to its government of paying interest on the €1.8 trillion total has soared in recent days. The finance minister, Giulio Tremonti, has promised a package of cuts worth €40 billion, but public hostility could derail the austerity plan. Silvio Berlusconi, the Prime Minister, is promising to water it down and attacked Mr Tremonti:

'He thinks he's a genius and everyone else is stupid,' Berlusconi said dismissively. 'He is the only minister who is not a team player.'
Chaos at the top of Italian politics is nothing new, but it usually doesn't have an impact on the economy. This time it reflects deep fears that Italian banks could be the next victims of international investors wanting to get their money out of any assets that remind them of Greece.

Italy's lenders were not part of the credit free-for-all that preceded the financial crash in the US, UK and Ireland. Some economists argue that fundamentally this major trading nation is, while always a bit of a mess, sound.

Compared to Greece, Ireland and Portugal, there are reasons for nervous financial markets to keep calm.

'Italy is still in better shape,' said Michael Spence, a Nobel-winning economist, in a radio interview. 'It has a high amount of debt, but it has high savings in the private sector, and frankly I think it can manage its way through this unless there is a huge attack on the Euro.'

Unfortunately, that is a big 'if' on which depends the fate of the third largest economy in the Eurozone.

Contagion spreads

Paul Mason, a BBC business reporter, says Greece is like a Black Dwarf, 'pulling the other troubled countries towards an orbit marked bailout'.

And the debt crisis has become very unpredictable.

Germany and the other stable Euro economies are still arguing with the European Central Bank about the best way to solve the crisis without having their taxpayers write out a blank cheque. Is it fair that in the meantime the list of potential casualties is getting longer?

You Decide

  1. Germany and France will never agree to spending around 10 % of their GDP financing Italian debt: the Eurozone will split rather than find a way to prop up a country as big as Italy. Discuss.
  2. 'Whether Italy deserves to be the second I in PIIGs is almost academic' writes one commentator. Is the judgment of the markets the right way to assess an economy's health?

Activities

  1. Read the links and write a short analysis piece of 600 words on how a nation can use borrowing to boost its economy – and at what risk and future cost.
  2. Design a new political and economic map of Europe: have you kept the Euro for all current Eurozone countries? Or have the PIIGs been pushed out? Where is the UK? Be as bold as you like.

Some People Say...

“Investors rush in and out of countries like a herd of sheep”

What do you think?

Q & A

Why is Italy in the firing line?
At the end of this week, tests on how solidly European banks are protected against shocks are expected to show up problems in Italian institutions. And Italy is one of the so-called PIIGs, the countries in the Eurozone whose economies are shaky.
Pigs?
No, PIIGs with two Is. Portugal, Ireland, Italy, Greece and Spain. They are sometimes called the peripheral countries. Economists say Italy is very different, but it has sluggish growth and a lot of debt.
Why is Berlusconi attacking his own man?
He knows cuts are unpopular, but the rest of Europe sees Tremonti as the man keeping Italy's head above water.

Word Watch

GDP
GDP or Gross Domestic Product is a measure of the value of all goods and services produced in a country in a given period. It is often used as a measure of a country's wealth.
Black Dwarf
A black dwarf is what would theoretically occur when a star cools and shrinks with age. The universe is not currently old enough for them to have come about. Hypothetically they would have an immensely strong gravitational pull.
Bond markets
Countries borrow money by selling bonds to investors, and so do banks and large companies and institutions. The bonds then trade freely and as a borrower's reputation suffers, investors demand better returns on their investment.
Bailout
Greece, Ireland and Portugal are currently receiving enormous injections of cash to rescue their stricken economies and pay interest on their huge debts. Italy is too big to be given a bailout, hence the widespread worry.
Lending free-for-all
Before the crash in 2008 and the tightened credit rules which followed it, governments and individual households were borrowing far too much money. Banks lent freely and supported themselves by selling 'assets' that turned out to be mixed with bad debts. The whole system unravelled, causing a worldwide recession.

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