• Azad Zangana - Senior European Economist and

Why's everyone talking about Italy (again)?


What’s special about Italy? How Covid-19 could impact Italy’s position in the Eurozone.


It’s the third largest member state of the EU and one of the most heavily indebted. So it went into the coronavirus crisis in a vulnerable position. “Debt as a share of GDP was at 134%, and that’s now expected to rise to over 150% of GDP by the end of 2020,” says Azad.


What problems is Italy facing?

Along with Spain and Greece, it is already finding it more expensive to borrow. “That, of course, is reflecting the higher degree of credit risk attached to these bonds going forward,” says Azad.


As it’s a highly indebted nation, he highlights two key problems.

“Number one: how are they going to service that debt going forward? And number two: how are they going to refinance that debt on an ongoing basis?” Azad says that while this year Italy’s budget deficit will probably rise to more than 10% of GDP, there will be support on offer.


What support will Italy be offered?

“The European Union have provided a three-pronged approach to helping member states out and with that around 2-3% of GDP worth of funding could be made available to Italy from the outset. “At the same time the European Central Bank has extended and expanded many of its asset purchases programmes.”


This is what is commonly referred to as quantitative easing. It is aimed at providing liquidity for the government bond markets and keeping the financial system moving.


How will Italy fare in the longer term?

The first risk is the withdrawal of support, once the COVID-19 crisis is over. How will Italy cope then with an even higher debt burden?


“When and if the ECB decide to scale back their quantitative easing programme, that support will be removed.

“Also, some of the loans that are being offered from the European Union are really only for this year and are supposed to be targeted at the furloughing of workers [and] healthcare costs,” he adds.


The second big risk is that Italy doesn’t grow very much.

“It hasn’t done so really since the Global Financial Crisis, averaging around 1% in nominal terms since then. In fact it’s grown at less than half of the average growth rate for the Eurozone overall for that period.


“So as a result it has had a very difficult time getting a grip of its public finances and getting debt under control.”

Azad adds that if things don’t improve then Italy’s growth problem will only get worse because it’s working population is aging and shrinking. “So the long-run dynamics for paying for this debt, just servicing the debt, is going to be very difficult,” Azad concludes.


But I thought it was Greece with all the problems?

When the sovereign debt crisis was unfolding, Greece, Ireland and Portugal sought bailouts from the European Union and the International Monetary Fund. But these nations are small and relatively easy to bail out.

“Italy today is almost three times as large as these countries put together, so it’s just not plausible to come up with enough capital to bail Italy out for a long period of time if they get shut out from bond markets.”