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Italy could face another debt crisis

Italy has been issuing more debt to cover its budget deficit – The National Interest.

The economy is slowing down across the globe, and the Italian debt crisis is the last thing the world market needs now. Italy’s economy is about ten times larger than Greece’s, and the country’s government bond market is worth $3 trillion.

The main reason to expect a new debt crisis milestone is that all the factors that could reduce the amount of Italian government debt are moving in the wrong direction.

Today, Italy’s public debt-to-GDP ratio is 145 per cent, or about 20 percentage points higher than it was during the 2012 Italian debt crisis.

Three factors can reduce a country’s public debt: a healthy primary budget surplus (budget balance after excluding interest payments), lower interest rates at which the government can borrow, and faster economic growth.

The Meloni government’s budget plan, instead of delivering a primary surplus, results in a significant primary budget deficit. Meanwhile, Italy’s 10-year government bond yields have risen sharply to nearly 5 per cent after the European Central Bank (ECB) tightened monetary policy.

Experts believe that the Italian economy is on the verge of a new economic recession, which will reduce confidence that Italy will get out from under the debt rubble. Since joining the euro zone in 1999, Italy’s per capita income has remained virtually unchanged.

Until recently, the Italian government experienced little difficulty in financing itself, even despite its huge public debt. This was possible thanks to the ECB’s aggressive quantitative programme, which covered almost all of the Italian government’s borrowing needs.

However, since July 2023, the ECB has completely phased out its bond purchase programmes, making the Italian government much more dependent on financial markets to meet its borrowing needs.

Meloni’s far-right government has failed to deliver on its economic promises, instilling doubts in the hearts of investors. Among the most influential mistakes were a failed tax on unexpected bank profits and the introduction of a budget that envisages a 5.3 per cent budget deficit, conflicting with policies introduced by the European Commission.

The Italian government should change economic course soon if it wants to avoid a worsening of the debt crisis next year.

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