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Italian Debt Levels

19 Feb 2019 - Market News

New analysis of Italy’s debt has come to two potentially damaging conclusions, which could have a large impact on the markets. First, that many other European countries owe Italy debt, which means that if the Italian economy suffers, those countries could be also in trouble. And second, that Italy’s debt is only going to grow as the economy begins to suffer.

The Italian banks are already struggling with around 1.5 trillion Euros of debt. However, other countries have loaned the Italian government debt, which totals around 425 billion Euros. New analysis has allowed us to see the debt breakdown. This allows us to discover which countries are most at risk if the Italian economy enters a recession. France is the most vulnerable, with French banks having extended Italy a total of 285.5 billion Euros. Almost half of France’s credit to Italy (125.5 billion Euros) was lent by BNP Paribas. The second largest lender to Italy was Germany, who have loaned a total of 58.7 billion Euros. The third highest lending country to Italy was lending 25.2 billion Euros. Finally, Barclays Bank (located in the UK) has lent Italy around 17.4 billion Euros. If something should happen to the Italian economy, these countries and banks could be seriously adversely affected. Analysis also suggested that the amount of risk could be growing, with Italy’s borrowing rate having briefly reached a three-week high. While Italy’s debt might be growing, other sections of the economy are shrinking, indicating that the problems could get worse for the Mediterranean country. 

As Italy’s debt grows, aspects of the economy have shrunk, leading many economists to believe that the situation could get worse. In the fourth quarter of 2018, Italy officially entered a recession. This indicates that economic growth is either declining or stagnating while unemployment and bankruptcy rates rise. Additionally, manufacturing Purchasing Managers Index (PMI) sunk to 47.8 in January. The PMI is generally considered a good indication of the general economic health of a country and is a leading indicator used by investors to predict Gross Domestic Product (GDP).  A value of 47.8 indicates that manufacturing in Italy is contracting, which could point to serious economic difficulties ahead. Furthermore, the Italian government is planning new schemes that will continue to increase the country’s national debt.

Two critical factors in determining the economic health of a country are its debt levels and its key financial indicators. In Italy’s case, both these indicators are negative. First, the national debt is very high, and the government has plans to increase spending, which will make the debt levels grow higher. Second, many economic indicators, including PMI, indicate that the economy is under some pressure. Based on this, it can be concluded that Italy, while unlikely to have an economic meltdown, is likely to experience a weaker economy in the short-term future.

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