Debt, a deep rooted Italian malaise

Btp-Italia-istruzioni-per-l-uso_h_partbThe un-sustainability of public finances is an issue that Italy can’t manage to tackle since the Seventies of last century. On September 1, 1974, Italy had to borrow from West Germany the money needed to stave off complete collapse but had to give up the Bank of Italy‘s gold holdings as collateral. There is a number of reasons why the country in just a few years transformed itself from a healthy economy with a strong currency into a debt distressed one, the main possibly being a political class totally un-educated to manage a complex modern industrial nation, who overspent taxpayers’ money in order to gain and maintain political consensus. Just to mention an example, a Christian Democrat government in 1963, when the economy was just booming, passed a law allowing people to retire after just 15 years of work – and take a lifelong pension. Such as a measure, along with several others, paved the way for the public debt to skyrocket in the decades to come.

There were several attempts to halt the out of control public deficit late in last century and early in the current one, always linked to the need to comply with Europe’s monetary and economic constraint, but they were regularly abandoned as soon as some tangible result was achieved. International financial crisis, like the oil shocks or most recently the Lehman blow-up, acted obviously as a catalyst for a new Italian debt panic selling wave. Nowadays the nation’s state debt passed the two trillion euros threshold with the government struggling to cut expenses and promise privatizations –as usual. Maybe that’s the right time, the post war political class is at its third generation and possibly more aware of the importance of economics in ruling a country.

In the early years of the euro the situation of the country’s debt marked some improvement while grew the appetite of international investors for Italy’s securities. Over those years, Italy managed to extend the average duration of the debt to over 7-year, one of the longest among industrialized countries. Before Lehman, some 60% of the debt was into foreign hands with the remaining held in Italian pockets. Today is quite the opposite, as the country’s banking system filled the gap, and is now paying a dear price for that in terms of asset quality. In other words, the vicious circle of the debt infected the banking system, which before Lehman was seen as one of the soundest in Europe and even after the subprime crisis was less impacted than those of Spain, UK, Germany (no state bailout for banks in Italy). The real trouble for banks arrived only in 2011 with the sovereign debt crisis.

But, there is to say, Italians somewhat loved their huge state debt too. All through the Seventies and the Eighties it provided them with generous double digit interest payment and with the arrival of the euro, and with interest rates falling near zero, many sighed for the end of the good times bonanza. After all, in the last three years the crisis had some not unwelcomed aspect for Italians, the comeback of appealing interest payments from the BTPs they own and continue to buy regularly at every Treasury auction.

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