italian-exit-from-the-euro-would-be-economic-suicide
Articles

Italian exit from the euro is very unlikely

The political problems in Italy have rocked the financial markets. An exit from the euro, however, is very unlikely. That would be economic suicide. Furthermore, the Italian national debt cannot be compared to that of Greece.

Italy's debt servicing at its lowest level since 1970

In Italian, "ciao" means both hello and goodbye. Italy's president Mattarella may have used the word to welcome – and then take his leave from – head of government Conte, who was appointed and then resigned. However, if you look closely, you can see why the risk that Italy will trigger a new euro crisis should be lower than the latest market reactions suggest.

Italy has accumulated 2.3 trillion euros in national debt. That is indeed too much: The national debt is currently more than 130 percent of the annual economic output of the country. Nonetheless, Italy's debt servicing over the past forty years was never lower than today.

italy-debt servicing-1970-today

Italy's debt servicing is at its lowest level in 40 years

National debt servicing in relation to GDP
Source: OECD, Wall Street Journal

Lower interest for Italian national debt

Last year, the Italian government paid debt interest in the amount of 65 billion euros. That is less than in any other year since the introduction of the euro in 1995. By the end of 2020, around 600 billion euros in government bonds will be up for refinancing – no less than approximately 30 percent of the entire economic output.

However, despite the recent rise in yields for Italian government bonds to 3 percent, the refinancing of this debt will lighten the government budget. Because the maturing bonds even cost an average of 3.2 percent. There is also something else stabilizing Italy's financial situation: Private debt is among the lowest in Europe and the retirement age, soon to be 69, is the highest in Europe. Things are not always the way they seem at first glance.

Italian national debt in its own country

The idea that Italy could blackmail the EU with a demand for debt reduction is absurd. This is because it overlooks the fact that a majority of all Italian national debt belongs to the country's own banks, citizens, and pension funds.

The situation with Greece in 2011 was very different: The country had bargaining power with the EU because, at the time, most Greek government bonds belonged to European banks. In other words, Rome would have to negotiate a debt reduction with its own citizens, not Brussels. The authors of the first government program overlooked this spicy little detail – until they removed the demand completely.

Let us not underestimate Italy's political institutions or the creativity and zest for life of its people!

Burkhard Varnholt CIO Switzerland

An Italian exit from the euro would be economic suicide

An exit from the euro, jointly aspired to by populists on the left and the right, would be a disaster for Italy. A hypothetical scenario for the day of a valid exit declaration illustrates why it will not come to this:

1. The European Central Bank would have to immediately freeze all support payments to Italy's banks.

2. There would immediately be a run on Italian banks.

3. This would force the government to nationalize the banks, to declare a "bank holiday."

4. The risk premiums on Italian government bonds would explode. The creditors – Italian banks, pension funds, and the ECB – would have to deal with price losses of 30 to 50 percent.

5. Italy's fiscal vicious circle would trigger unfriendly defensive measures from other European countries.

6. Italy would be in a real state of emergency. The financial system would be insolvent. Citizens would feel robbed of their livelihoods. Economic depression, flight of capital, and social unrest would be virtually impossible to avoid.

Conclusion: no exit from the euro, despite anger

But, as we said, it will not come to this. Because the people, as well as the worlds of business and politics, would recognize these consequences in time – despite all the anger about the prevailing circumstances. Let us not underestimate Italy's political institutions or the creativity and zest for life of its people!