Dept to GDP is a key metric in economics and therefore also in politics.
Nordea just published this little chart to remind us that Italian debt is currently way worse than what the Greek debt looked like 10 years ago.
The graph below is a bit confusing ( it was to me). The Blue line is the Greek Debt/GDP ratio that is advanced by 10 years so that we can see the difference with Italy today. You might remember the Big EU debt issues back in 2011.
Back in 2011, Ze Germans had little difficulty in pressuring Greece because Greece wasn’t that big economy wise. Now, it will be a lot harder negotiating with the Italians since they are far (far) bigger. And since in absolute terms Italy has the third-biggest debt in the world, this is making people uneasy.
Debt/GDP of Greece Today:
So let’s look at how in this Euro Debt Crisis 2.0 the players are not exactly the same
Italy =! Greece
Let’s start with a quick comparison of how the Italian economy is integrated into Europe is to look at where the imports come from using data from Harvards Economic Atlas.
Economy
Italy
Notice the total imports from European countries is $299B (total includes other parts of the world)
Half of the imports come from just 4 countries in the EURO block (19 countries total).
Now look at Greece back in 2011, total imports $43.3B:
So first of Italy imports 7X more things from Europe than Greece does. That is a lot. Also notice that Italy imported a whole lot % wise from Germany. Also interestingly, the Greek imported a lot from the Russians back in 2011.
Representation in Europe.
Italy is the #3 power there, Greece 21 seats VS Italy 76 seats:
Besides Italy is a net contributor to the EU so I am pretty sure they have far better leverage than the Greek back in 2011.
From the EU website:
Next to that, they respected the germans requests to reduces the deficits to the Maastricht levels (2% of GDP) from 3.6% deficit in 2011 to 1.6% in 2019.
Data from 2011-2019, source: Eurostat.
Btw: while looking at this I saw that Greece is having Budget surplusses since 2016. 👀
Does it Matter?
There is quite a bit of fear and noise about “EU debt crisis 2.0”. And fear does weird things to peoples brains. Yes, Italy is far bigger than Greece and has a lot more power. Hence the fear is that Italy could really break the EURO.
In my opinion, Italy has better cards than what Greece had in 2011 so I am not that worried about the collapse. However, it is in some peoples interests to spin it that way. Remember Fear sells, so you should expect to get those type of stories.
Anyhow, it seems that as long as the ECB is prepared to do everything it can to keep the EURO going, some smart cookies will be taking advantage of the “ECB put”.
from the FT:
Dickie Hodges, a portfolio manager at Nomura Asset Management, said he bought Italian 30-year bonds following the downgrade, betting that it would provoke promises of more intervention from ECB president Christine Lagarde. “There’s no turning back for the ECB,” said Mr Hodges. “Every time the market starts to lose confidence in Italy, they will have to step things up. It doesn’t really matter whether Italy goes subinvestment grade if the central bank is buying everything.”
Back in 2011 some Hedge Funds made their dough buying discounted Greek bonds.
Will history repeat itself? Dickie seems to think so. He might be right although I don’t think the profits will be as juicy as they were with the Greek bonds. Back then Dart Capital and Elliot bought the bonds for 60 to 70 cents but in the end, they got paid the full dollar. I might be looking at the wrong things but it seems to me that the “discount” on the Italian bonds is still pretty small.
Anyway please also notice that Dickie up there is not buying Italian Equities, which have gotten a repricing due to Corona.
Neither is he talking about Italian banks (clearly not a Value Investor, lol) which have been clobbered in the past 4 years thanks to the ultra-low yields which is bad for their profits:
Dickie is playing it save by buying these 30Y Italian bonds that have a comfy 2.48% yield. He sleeps well at night knowing the ECB sort of has to do whatever it takes to keep itself in existence. And if the Americans can teach us something it’s basically Don’t Fight the FED.
BRRRRRRRRRR
Fin.