Earlier today, Morgan Stanley released a report titled "Debtflation - One Shock Away?", which we will review more in depth shortly, but here is the gist: "Because public (and private) sector leverage is very high in parts of [Europe], this unstable situation is better described as debtflation. With bond yields already very low, when inflation is so subdued the challenge for debt sustainability is whether real growth is enough to cushion any shock. Several euro area economies look vulnerable, we think."
Of these, Italy, which recently just returned into economic contraction and hence, a triple-dip recession, is the most vulnerable. To wit:
Italy – debt stock problem… We expect a primary budget surplus of about 2.3% of GDP this year. Yet, with nominal GDP growth close to zero, this would not be enough to stabilise the debt trajectory. What’s more, 2014 debt/GDP and interest expenses/GDP – which we estimate at over 135% and 5.3%, respectively – are so high that a descending debt trajectory would only be achieved with a primary budget surplus higher than 5% of GDP, which should be maintained over time, thus requiring a permanent austerity drive.
…requiring an ambitious combination of real growth and inflation: Or, alternatively, government debt could come down, assuming an unchanged primary budget surplus (2.3% of GDP) as in the exercise above, if nominal growth were to accelerate to at least 3%Y. Yet this would require substantially higher inflation, which doesn’t seem to be very likely in the near term, or stronger real growth – which is unlikely to materialise too, unless a long period of political stability and structural reforms were to come through.
Of course, there is a "hard way" of doing, as in fixing, things and then there is... the European way.
Below we show how Italy's debt/GDP for 2013 just was "reduced" by 5% making the country appear far more "sustainable" and attractive to debt investors (the ECB?).
As Bloomberg reports, Italy’s 2013 public debt was revised to 127.9% of GDP from a previous estimate of 132.6% of GDP, the country’s statistics agency Istat says in report. From the report.
The National Institute of Statistics releases the estimates of Gross Domestic Product (GDP) and General Government debt in accordance with the definitions of the European System of Accounts (ESA2010) and Council Regulation (EC) n. 549/2013.
In 2013, GDP at current prices decreased by -0.6% (to 1,618,904 million euro) compared with the previous year.
The chain-link volume measure of GDP fell by -1.9%, after a decrease by -2.3% in 2012.
The fall in GDP was due to a sharp contraction in Gross fixed capital formation (-5.4%) and in Final consumption expenditure (-2.3%). Imports decreased by -2.7%.
General Government net borrowing was -45,358 million euro (-2.8% of GDP), comparing with -3.0% of GDP in the previous year, while General Government debt went up to 2,070,165 million euro (127.9% of GDP).
And that's how stuff is done in Europe.