Italy’s economic crisis could do real damage to US and global markets

[Kamaji]

Italy’s economic crisis could do real damage to US and global markets

By Desmond Lachman
July 21, 2022

Remember how a dozen years ago the Greek sovereign-debt crisis roiled US and world financial markets? Get ready for another European debt crisis this fall — but this time in Italy, a country with the world’s third-largest government-bond market and an economy some 10 times the size of that of Greece.

It’s never a good time for Italy to have a major political crisis. But this one is occurring at a particularly inopportune moment. At 150% of its economy, Italy’s public debt has reached its highest level on record. At the same time, its economy is being battered by the European Central Bank’s shift to a more restrictive monetary policy to fight inflation and by Russia weaponizing its natural-gas exports as part of its war against Ukraine. This makes it difficult to see how a sclerotic Italian economy in political turmoil will be able to grow its way out from under its debt mountain.

The collapse of the coalition government of Mario Draghi, a former ECB head, triggered Italy’s latest political crisis. This opens the way to early parliamentary elections, probably in September or October. It also means considerable political uncertainty — not least because it could lead to the formation of a neo-fascist government led by the Brothers of Italy party, which is not known for being supportive of the European Union.

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All this more than likely points to considerable volatility over the next few months in the Italian bond market in the run-up to the parliamentary elections as investors question the country’s long-run ability to repay its debt.

This could be of great importance to US and world financial markets. In 2010 the Greek sovereign-debt crisis sent shudders through world financial markets. Imagine how much damage an Italian debt crisis could do. After all, Italy’s economy dwarfs that of Greece, and it has a government debt of more than $2.5 trillion.




Source:  https://nypost.com/2022/07/21/italys-economic-crisis-could-do-real-damage-to-us-and-global-markets/