With Italy's sovereign bond yields hovering at 3 year lows, one could be forgiven for falling for the constant stream of gibberish from EU leaders that the worst is over. However, aside from the 'promised' OMT foot on the wind-pipe of non-domestic bond vigilantes (fighting an inexorable demand from self-referential banks and pension funds bidding for BTPs), the situation remains bad at best and in terms of debt-to-GDP, the worst since 1925 when Mussoilini was proclaimed fascist dictator. With Letta and his allies forming the 64th cabinet since WWII (and 27th since 1980) his lifespan seems limited to change anything and with Italy accounting for 16.5% of the EU's GDP (and forecast to contract 1.9% next year) - the current real GDP is smaller now than in 2001. Attempts to revive growth are about to be thrown into tumult once again as Berlusconi's party threatens mass resignation. As we noted last night, do not be fooled by the apparent tranquility in Europe.
Via Bloomberg Brief (@EconomistNiraj),
Prime Minster Enrico Letta’s attempts to revive economic growth may be in jeopardy as a result of a political storm triggered by Silvio Berlusconi’s conviction for tax fraud. Berlusconi’s People of Liberty party is threatening a mass resignation of parliamentary deputies that will bring down the coalition government unless President Giorgio Napolitano pardons Berlusconi.
Letta has told allies that he will quit before being pushed out if support dwindles, Italian daily la Repubblica reported on Aug. 3. His Cabinet is the country’s 64th government since World War II and the 27th since 1980. That equates to each government lasting just over a year on average. Berlusconi has been prime minister for nine of the last 20 years.
GDP data today are likely to show the recession continued for an eighth quarter. S&P downgraded Italian government debt in July to BBB from BBB+, forecasting the economy will contract 1.9 percent this year. The nation accounts for 16.5 percent of the euro-area economy and is the weakest performing G-7 nation. Real GDP of Italy is smaller now than it was in 2001.
The political turmoil may prolong the recession and prevent Italy’s debt-to-GDP ratio, the second largest in the euro area after that of Greece, from falling in line with IMF forecasts. The nation’s 2 trillion euros in outstanding debt accounted for 127 percent of GDP in 2012, the highest level since Benito Mussolini won elections in 1924, and is projected to peak at 130.8 percent next year before dropping to 123.4 percent by 2018. That assumes the economy will begin to grow toward the end of 2013.
Italy’s cost of borrowing may rise as Letta’s position weakens. Ten-year yields have been below 5 percent since November, averaging 4.4 percent. Yields topped 7 percent last autumn at the height of the political crisis, leading to concerns the nation would need a bailout. Italy needs to roll over 143 billion euros of debt in the remainder of 2013. That is the equivalent in size to the combined economies of Luxembourg, Croatia, Latvia, Estonia and Cyprus.
But apart from all that... Italy is doing great!