There’s much to-do this week about rising yields on Italy ’s sovereign debt, which are near 7%. That happens to be the level of yields in Greece , Portugal and Ireland when those nations sought bailouts, and many posit 7% yields will force Italy to seek assistance of some kind.
One shouldn’t lend much credence to the apparent link between 7% yields and bailouts, however. In Greece , Portugal and Ireland , it appears more coincidental than causal that investors largely ceased purchasing sovereign debt once yields hit 7%. Each of these nations could, perhaps, have continued floating debt at higher rates, but since the IMF/EU/ECB offered funding at less than the prevailing market rate, it no longer made sense to issue debt to investors.
Thus the question becomes whether Italy is, structurally and economically, in as bad of shape as Greece , the most troubled eurozone nation. A close look shows Greece is rockier than Italy . Its debt is over 140% of its GDP, and its GDP growth has remained negative since the global recession ended in 2009. Greece ’s economy is also very uncompetitive. The public sector employs around 40% of workers, private businesses are concentrated in a few select industries, onerous regulations hinder entrepreneurship and private business activity, tax collection is hugely inefficient and corruption is rampant. By contrast, Italy has high outstanding debt, but its government runs a primary budget surplus (spending is less than tax revenue). Italy ’s economy is also growing still, its economy is deeper and broader than Greece ’s, it is already implementing austerity measures, and it has far less tax avoidance. Simply put, Italy is not Greece .
None of this is meant to say Italy won’t need any assistance from the IMF/EU/ECB; if this so-called “troika” were to offer Italy funding at lower yields than Italy would be forced to pay on the open market, it seems reasonable to assume Italy would accept this form of aid. However, one shouldn’t assume this will automatically happen at 7%.
Fisher Investments’ Fourth Quarter 2011 Stock Market Outlook further explains the structural and economic differences between each of the five PIIGS nations ( Portugal , Ireland , Italy , Greece and Spain ). More information on this publication is available here.
