I was curious to visualize the size of the rescued economies in Europe considering the current turmoil about Italian debt, which by the way represents the biggest challenge so far in the Euro crisis. Just to start, take a look at the size GDP (in USD) of the following countries:
Then we have to understand how much money the debt of those countries represent. I mean, considering the German and other wealthy north European countries’ taxpayers that are angry about the ECB going around bailing out troubled countries for the sake of the Euro sovereignty. Well, it happens that the debts of Portugal, Ireland and Greece, combined, represent less than half of the Italian debt (which stands at 120% of their GDP):
Scary, isn’t it? Now finally we take a look at a report from the IMF about Fiscal Monitor issued in September 2011 to see who actually holds the debt of the rescued countries. Notice that a great proportion is in hands of non residents, which is not the case for Italy where are mostly domestic banks and investors (44.4%). So every time you hear in the news about moves for “pleasing the markets” it’s mainly these non resident investors/debt holders.
You might want to keep and eye also on France, who’s credit rating was “accidentally” downgraded today to to a “technical error” by S&P. What if Europe’s second largest economy was really downgraded considering that 63% of their debt is held by nonresidents. Though one…
Coming back to Italy, in a letter to European Union leaders in late October 2011, Berlusconi promised partial reform of the Italian pension system (increasing retirement age), loosening of labor laws (make it more easier to companies to layoff workers) and other series of structural reforms aimed to convince the EU leaders that Italy could be able to sort their self inflicted fiscal measures to reduce their debt burden. Leaders and markets didn’t bought it.
So is Italy to big to be rescued? I think it is a matter of how the ECB and European leaders can come up with a bailout “proposal” considering the size of Italy’s economy, and of course, the largest threat to the Euro’s credibility so far. Whether Berlusconi steps down or not, the only way to regain market confidence is by implementing actions, not promises, to lower their borrowing costs for the long run (which currently soared over 7%).
Moreover, in a very personal opinion, I don’t think this is a Berlusconi problem, I think it is a problem of which Italian leader will convince Italians that they are in front of a long path of painful austerity measures for many years to come. Which on the other side could be, why not? a wake up call for innovation and higher productivity.