According to Capital Economics, a “potential time bomb” remained by Italy’s debt which was the highest debt in the European region last year and now the country is at risk of default unless it boosts productivity. The Bank of Italy warned that Italy has a record public debt of 1.813 trillion euros, an increase of 0.8 percent in a month, after the three weeks the centre-right government acted to cut overspending.
PIGS – Portugal, Ireland, Greece, and Spain are referred in financial circles and in the near future, included Italy as one of the European countries at risk of going bankrupt. For these eurozone countries, the common denominator is mounting budget deficit coupled with weak economic growth.
Compared to PIGS, Italy’s current debt of 5.3 percent of GDP is relatively low. However, the total debts in Italy are almost double that allowed limit – at a whopping 117 percent of GDP. To these levels, financial markets have apparently become accustomed as Rome’s total debt was almost 100 percent.
Although on a financial tightrope for quite some time, Italy has been able to manage its economy because the country’s industry is better constructed than some of its southern European neighbors. It is expected the Italian economy is grow by 0.7 percent in 2010.
Italian Prime Minister Silvio Berlusconi and his government calls for a vote of confidence in the Italian Parliament for unpopular €25 billion ($31.45 billion) austerity package. Roger Bootle and his economic staff at Capital Economics are questioning whether the country holds great danger for the euro zone
Capital Economics said that “We think the size of the government’s debts will eventually prompt the markets to turn their sights on Italy,” Capital Markets Managing Director Roger Bootle and chief European economist Jonathan Loynes said in a report “A default is a distinct possibility”
Bootle wrote in a research note “Perennially weak growth and a mountain of government debt mean that the Italian public finances are a potential time bomb waiting to explode,” “We think the size of the government’s debts will eventually prompt the markets to turn their sights on Italy and a default is a distinct possibility,”
Bootle said that “Italy could soon be front and center on the sovereign debt story with a lot of focus until now on the likes of Greece, Spain and Portugal” “If another euro zone member were forced into restructuring or default, Italy would find it difficult not to follow suit” he added “If sustained pressure from the markets and a prolonged bout of sluggish growth prompted one or more of the peripheral euro-zone economies to default and leave the euro, we think that the Italian government could be under great pressure to do the same.”
He said “Italy is in a better position than other so-called PIIGS but not without its problems” “Italy’s budget deficit is small, household debt remains low and the banking system appears to be in relatively good shape.”
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