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Unformatted text preview: ding, they were also able to reduce deficits and debt. In Italy, debt fell by 10 percent of GDP from 1999 to 2007. Greece cut its debt by a
larger 12 percent of GDP over the same period. This was a step forward, though other highly indebted countries, such as Belgium, did much better.
Since the outbreak of the crisis, debt in Greece and Italy has surged, as in other countries. In 2008 and 2009, Greece ran public deficits twice the size
of Italy’s and added about twice as much debt as a share of GDP. But the fact remains that Italy’s debt load today is similar to that of Greece.
Debt as % of GDP, Current and Projected Japan
Sources: European Commission, IMF, OECD. 2009
--- With a public debt of 115 percent of GDP and interest rates near 4 percent, Italy must spend about 4.5 percent of GDP a year just on interest—the
equivalent of its public education budget this year. Moreover, even if public revenues are able to cover all expenditures, interest costs will still lead Italy’s
debt to grow faster than its sluggish economy—which consensus expects to grow at an average annual rate of 3 percent in nominal terms over the next
seven years. Therefore, the debt burden will grow larger each year unless the primary balance (the difference between public sector revenues and
expenditures, excluding interest paid on the public debt) moves firmly into surplus. Since Italy’s debt is of relatively short maturity, Italy is potentially
more vulnerable than other countries to a change in market sentiment. Better Fiscal Management
By moderating expenditures, partly via pension reform in the 1990s, and increasing revenue through temporary tax measures, Italy has avoided a
starker debt explosion so far. More recently, its conservatively managed banks did not need a bail out, nor did Italy enact substantial fiscal stimulus.
Crucially, Italy’s lower fiscal deficits, together with higher private sector savings, establish an external balance that is also sounder than that of Greece.
From 1993 to 1999, Italy’s current account was in surplus, and the country has maintained a modest average current account deficit of 1.6 percent of 3 of 6 4/25/2011 11:51 AM c N. M. Kiefer Economics 4230: Banks 36/ 40 Italy
For Italy, 1996, 7 and 8 were crucial for meeting the criteria for full
membership in the EU.
It needed a little work to reduce deﬁcits. JP Morgan arranged a
complex currency swap in which Italy received substantial up-front
payments in exchange for having to make large payments in the
future (politicians like this structure).
This was not recorded as a l...
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This note was uploaded on 01/27/2014 for the course ECONOMICS 103 taught by Professor Angie during the Spring '12 term at Columbia College.
- Spring '12