Stratfor: Italy’s Debt Crisis

Posted on 17/01/2012 by


Short Analysis

At the center of Europe’s debt problems is the fact that most of the Continent’s wealth is in the north, while the region’s periphery cannot grow without outside credit. That credit was made available with the creation of the eurozone in 1999, putting member states into the same capital pool. Many states — most notably Greece, Italy, Spain, Portugal and Ireland — were able to access credit in unprecedented volumes, generating debt loads that are proving unsustainable. Starting in early 2010, it became obvious that sovereign defaults were imminent unless outside support became available. As the end of 2011 approached, it became clear that the next country likely in need of a bailout was Italy — and conservative estimates put the cost of such a bailout at 800 billion euros. Barring large-scale support, Italy — with its 2 trillion euros in national debt — was sliding quickly toward default. By December 2011, investors were regularly demanding some 7 percent on its government debt — roughly twice what it had been paying during most of the euro era. Such high and rising borrowing costs for a country with a debt load of 120 percent of gross domestic product (GDP) largely made a default inevitable.

European states were unwilling to increase their commitments, extra-European states were uninterested in paying into funds without more European commitments, and the IMF lacked the resources (by half) to bailout Italy. The only institution that even theoretically could help was the ECB, which, as the manager of the eurozone money supply, could purchase sufficient volumes of Italian government debt to stabilize the system. After explicitly stating Dec. 8 that no such support would be forthcoming, the ECB reversed course and news leaked that it was prepared to purchase up to 20 billion euros a week of stressed eurozone government debt. That amounts to potentially one trillion euros per year. Not only is that more than enough to buy up all of Italy’s debt, it is potentially enough to purchase roughly 80 percent of the 1.25 trillion euros in eurozone debt that comes due in 2012. Even adding in planned new debt issuances only raises the total volume of all sovereign eurozone debt to 1.5 trillion; the ECB could potentially buy up two-thirds of all that by itself. Barring severe miscalculations on the part of ECB officials managing the purchases or national governments issuing the bonds on the issue of timing, it will be impossible for a eurozone country to default in 2012.