At the end of May Italy suffered one of its recurrent political crises. Doubts about the country grew, rapidly revaluing the credit risk assigned to its sovereign debt. On this occasion, the involvement of non traditional political parties called into question the Euro project in the Eurozone’s third largest economy, and this was reflected in the markets.
Now “the waters appear to have calmed”, and in fact last Thursday’s emission of Italian debt was not the centre of attention. Nevertheless, analysts at Intermoney believe we will see more episodes of tension originating in Italy. The key moment is likely to come at the end of the summer or in the autumn when the drafting of the Italian budget will coincide with the revision of the opinions of the ratings agencies.
In principle, this situation should be seen as a scenario for tension rather than rupture, in other words “we don’t expect blood in the river”, although contagion to other peripheral economies could be possible. Nevertheless, if current conditions were maintained the outcome would be more constrained, and not put at risk the stability of countries like Spain. Even so this situation should not make us complacent and we think it would sensible to consider what would happen in the event of a more extreme scenario linked to, for example, a “black swan”. Are we really better than Italy?
On the basis of two key questions like the scope for growth and the levels of public debt, we can say that our country is in a more favorable situation than Italy. The weak bases for growth in the Italian economy are shown in its GDP performance this century: Italy has grown 4.5% compared to 36% in Spain. But the key is the capacity for future growth. Here the differences are clear, given that Italy’s growth potential is close to zero, whereas Spain’s is 1.7%.
This is also captured by the World Bank’s “Doing Business” ranking, where Italy is ranked at 46th as 46th in the global rating for doing business, compared to Spain at 28th.
The second major question that favors our country is the level of public debt as a percentage of GDP. This was 98.8% at the close of the first quarter of 2018, far from the 133.4% of Italy. However, the primary and structural deficit exceed -3% of GDP, whereas Italy has enjoyed a recurring surplus of 1.5% over the last three years, while its structural deficit is only -1.7%.
The structural deficit will get worse this year in Spain and, in Intermoney, the analysts calculate it will reach 3.5% of GDP in 2019, as opposed to the 2% defended by our government.
The problem is that, currently, Spanish fiscal policy has very little margin for expansive strategies in the future. This is shown in simulations carried out by the Independent Authority for Fiscal Responsibility (Airef). For example, even when the authority ran an optimistic simulation based on nominal growth of 3.3% until 2033 and equilibrium in the primary structural balance, public debt only reduced to 83.3% go GDP by the end of the timeline (2033).
Thus, although the burden of debt is less in Spain, our fiscal margin in case of a stress scenario would be less. Therefore we should question whether the difference in public debt of almost 35 percentage points of GDP would be sufficient to secure better treatment than Italian assets.
Public debt is only one side of the coin. We must also take into account private sector obligations.
Altogether, non-financial (consolidated) private sector debt amounts to 113% of GDP in Italy, as opposed to 139% in Spain. The difference can be justified in terms of the gap in growth between the two country’s in the current expansion.
Nor can we forget Italy,s other strong point: household debt as a percentage of their gross disposable income (the key reference) amounts to a comfortable 61,2%, as opposed to 100.3% for Spanish households. In addition, these levels of household debt in Italy enjoy an additional cushion in the margin of savings, which reaches 9,7% of gross disposable income in Q1 2018, as opposed to 5% for Spain.
Finally, the external perspective also favors Italy. Three pieces of data demonstrate its strengths: its capacity for financing reaches 2.7% of GDP, compared to 2.2% for Spain; its current account surplus will exceed 2.5% in 2018 and 2019, while Spain’s is estimated at 1.5%; and the deficit on its net international investment position rises to -7.8% of GDP (far from the -35% limit set by Brussels for being considered unbalanced) as opposed to 80,2%. Finally, the external debt rises to 124% (Q4 2017) as opposed to 165% for Spain.