Italy: stuck in low growth; rising debt

The Italian Trap: stagnant growth and rising debt.

Following today’s news that the Italian economy had eked out just 0.01 per cent growth in the second quarter, another headache for Rome: total debt also expanded to €2.249tr in June, up from €2.241tr, writes Mehreen Khan.

The two dynamics are intimately related. Weak growth amplifies debt ratios through something known as the “denominator” effect. With the economy showing little signs of life since the financial crisis (the IMF thinks the economy won’t reach its pre-crisis size for another decade), its public sector debt burden has also climbed.

The country’s total government debt pile stands at 132 per cent of GDP, the second highest in the eurozone after Greece.High debt burdens constraint a government’s room to operate fiscal levers when faced with a downturn, while making it vulnerable to any shifts in investor sentiment that could provoke a solvency crisis.

Insipid economic growth will also provide no relief to the country’s beleaguered banking system. With Italy lumbering under a bad loan burden of €360bn, its non-performing loans are a reflection of its non-performing economy.

Judging by today’s data, things aren’t going to get much better any time soon.

(Hat-tip to Frederik Ducrozet at Pictet for the second chart. First two charts courtesy of Bloomberg).