Is Italy Next To Fall In Euro Zone?

A combination of massive debt, a lack of competitiveness and a feeble outlook on economic growth may be the reasons that Italy will be the next euro zone nation to fall.

On the debt forefront, Italy’s debt is expected to balloon up to 117.8% of GDP by next year.  Although Italy’s debt is not rising as rapidly as that of Spain or Ireland, it is still at an alarming rate.  To further add to the nation’s problems, yield spreads between 10-Yr Italian and German government bonds widened to 1.58 percentage points, wider than before the bailout rescue plan was put in place.  The widening in this yield spread means that investors judge it riskier to buy the debt of Italy than that of Germany and implies that investors are not confident in the economic health of Italy.

Additionally, credit-default swaps on Italian government debt are at record levels, with $10 million of insurance costing nearly $248,000 per year, indicating that elevated risk is present.  Lastly, Italy has nearly €1.5 trillion of debt outstanding, making it the third largest debt market in the world behind the U.S. and Japan.

To put Italy’s debt problems into perspective, at current debt levels and interest rates, the nation must spend nearly 4.5% of its GDP per year just to cover interest payments and will likely continue to increase. 

To make things even more challenging for Italy, the nation’s competitiveness has been deteriorating.  A study conducted by the European Commission concluded that over a ten year time span from 1998 to 2008, exports of goods and services grew more slowly in Italy than any other country that was a member of the European Union.  This decline in competitiveness, caused primarily by falling factory production, has further led to tepid economic growth.  With no real policies and procedures to ameliorate this predicament, Italy’s economic growth future appears grim. 

In a nutshell, unless Italy’s debt issues are resolved and it figures out a way to boost productivity, its outlook remains bleak impacting the following ETFs:

  • iShares MSCI Italy Index Fund (EWI)
  • iShares MSCI EMU Index (EZU), which allocated 10% of its assets to Italy.

Disclosure: No Positions

Categories: ETFs, Latest Weekly News

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