Spain debt

Analysis: Ten years later, Italy faces a debt crisis that Draghi may not solve

  • Draghi resigns but the head of state asks him to stay
  • Investors question Italian debt sustainability
  • The central problem is the lack of economic growth

FRANKFURT/ROME, July 15 (Reuters) – A decade after Mario Draghi’s “whatever it takes” pledge saved the euro, Italy is once again in the midst of a debt crisis – but the country’s prime minister and former head of the European Central Bank may struggle to resolve this one.

Just like a decade ago, investors are wondering if some eurozone countries can continue to refinance their public debts, which have ballooned during the pandemic and are becoming more expensive to refinance as the ECB prepares to raise interest rates. ‘interest.

This time, however, the epicenter of the crisis is Italy’s secular lack of economic growth, rather than the financial excesses that plagued Greece, Portugal, Ireland and Spain 10 years ago. year.

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The situation in Italy has just become much more unstable.

Draghi offered to resign on Thursday after one of his fractured coalition parties refused to back him in a confidence vote, only to have his resignation rejected by the head of state. Draghi is due to address parliament on Wednesday with his future still at stake. Read more

Italy’s benchmark 10-year yield hit a high of 3.5% on Thursday and the spread to safer German Bunds widened to 227 points at the close, having more than doubled since the start of the month. year.

“Things have only gotten worse, it’s hard to say how much,” said Dirk Schumacher, economist at Natixis.

Draghi, 74, nicknamed ‘Super Mario’ because of his long career as a financial problem-solver, saw Italian borrowing costs rise during his 17 months as prime minister, something he acknowledged during from a press conference two months ago.

“It shows that I am not a shield against all events. I am a human being, and so things happen,” he told reporters.

The deeper problem is that Italy is big enough to bring down the rest of the eurozone periphery because its public debt of 2.5 trillion euros ($2.52 trillion) is larger than that of the other four countries combined and too large for a bailout.

A decade ago, the then ECB president restored calm to the markets by saying the ECB would do ‘whatever it takes’ to save the euro – countries’ bond buying code in trouble.

His words of July 26, 2012 reverberate to this day, keeping markets relatively calm on the expectation that the ECB will once again cap borrowing costs, including through a new bond-buying program currently in the works. Read more

But that’s likely just another stopgap solution, as investors are bound to test the ECB’s resolve until Italy convinces them it can fend for itself.

“The real problem is that Italy has been a growth underperformer for two decades,” said Moritz Kraemer, chief economist at LBBW. “And the budgetary situation is not the cause, it is the consequence of this weakness.”


Italy never had to deal with the bursting of a real estate bubble during the global financial crisis and its fiscal problems were less than those of the other four troubled countries.

He therefore did not have to follow them in asking for a bailout from a so-called troika made up of the International Monetary Fund, the European Commission and the ECB.

He may now come to regret it.

Under pressure and backed by money from international lenders, Portugal fixed its budget, Spain and Ireland cleaned up their banking sectors, and even Greece made reforms, including to its pension systems, labor market and product regulation.

These efforts have enabled these countries, to varying degrees, to return to economic growth.

Italy, on the other hand, has not done enough to revive growth despite some changes to its pension system, labor market and, under Draghi, its notoriously slow judicial system. Read more

As a result, the country that was once seen as the best of bad luck is now paying the highest premium for borrowing in the bond market after Greece – a country that has defaulted twice in the last decade and is is always rated “junk”.

Persistent anti-euro rhetoric from some right-wing parties is also keeping investors on edge, with Intesa Sanpaolo saying the risk of a lira comeback outweighed that of a default in the cost of buying insurance on the Italian debt.

“It’s been very profitable for Spain, Portugal and Greece to have the troika,” said Berenberg economist Holger Schmieding.

“Draghi is trying, has done a bit here and there but neither I nor the market are yet convinced that the trend growth in Italy is strong enough.”


As head of the ECB, Draghi has regularly stressed the importance of fiscal and other reforms by governments. But as Italy’s prime minister, he has had to spend much of his time mediating between parties with very different views on economic policy, which means contentious issues such as the reforms of the taxation and pensions were largely rejected.

Even if he overcomes the current political turmoil in Rome, with his governing coalition weakened by divisions and a general election looming in the spring of 2023 at the latest, few expect the prime minister to turn things around.

Draghi finalized a plan presented to the European Union in exchange for nearly 200 billion euros in pandemic recovery funds and ensured a good start to achieve the hundreds of so-called “targets and milestones” contained therein.

But these are mostly small-scale changes to legislation – a total of 527 of which will need to be ticked off by 2026, long after Draghi is gone.

This money, made up of grants and cheap loans, could prove a lifeline for Italy if it were to tighten its own budget.

But the country’s track record of using financial aid from Brussels is dismal. It only managed to spend half of its EU funds in the last budget cycle, the second lowest share after Spain.


To be fair to Draghi and his predecessors, Italy’s malaise is much older than the global financial crisis.

Its GDP per capita is lower today than it was 20 years ago, when it was only slightly lower than that of France and Germany.

All other European countries experienced growth during this period, with the exception of Greece which fell less, leaving Italy as the worst performer in the bloc.

According to Eurostat data, trend growth – or the average growth rate over the economic cycle – is on the rise in all the so-called peripheral countries, with the exception of Italy.

Italian productivity – or the amount of economic output extracted from an hour worked or a euro invested – stopped growing in the 1990s and has since fallen.

Behind this lies a web of problems that include a rapidly aging population, an unskilled workforce, a sickening bureaucracy, a slow and dysfunctional justice system and chronic underinvestment in education, infrastructure and new technologies.

Many eurozone countries have some of these problems, but few, if any, have them all.

Some economists, including Chicago Booth School of Business professor Luigi Zingales, say Italy has essentially missed the digital revolution and blame what they call italian disease entrepreneurs who choose to keep a small business in the family rather than developing it with the help of outside investors.

By joining the euro, Italy also lost the quick fix of being able to devalue its currency – a trick that helped Italian industry thrive for decades by making its exports cheap.

“We chose the wrong growth model in the 1980s,” said Francesco Saraceno, an economics professor at Luiss University in Rome and Sciences-Po in Paris.

“To respond to globalization, we tried to compete with emerging markets by cutting costs instead of following the German example of investing in higher quality production.”

($1 = 0.9917 euros)

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Reporting by Francesco Canepa and Gavin Jones; Additional reporting by Giuseppe Fonte and Dhara Ranasinghe; Editing by Susan Fenton and Daniel Wallis

Our standards: The Thomson Reuters Trust Principles.