Its earlier AA rating was due to the unspoken assumption that any eurozone member had an explicit guarantee from its fellow countries. This was a fallible assumption, especially when Italy should probably never have been allowed to join the euro. At the time, it used a number of one-off measures to squeak in – not that other countries were saints in this regard, but Italy’s one-offs were of an unparalleled scale and cheekiness.
Now, the four-member coalition government squabbles while the ratio of Italy’s debt to GDP remains above 100%. The country is the third largest sovereign debtor in the world after the US and Japan, but unlike them, its anaemic GDP growth rate, forecast at 1.2% this year, will not help the debt situation. The S&P downgrade will also hurt, as Italy will probably be forced to pay more for its debt.
Prime Minister Silvio Berlusconi, in his capacity as interim finance minister, went to Brussels to plead for understanding. He got it – not surprisingly, as countries worth an estimated 85% of the GDP of the euro zone are in violation of the Stability Pact.
The problem is that this year’s 3% debt to GDP target relies on yet more one-off measures worth E12bn, many of which look unviable. Some of these are held up in court while others are bringing in less money than expected.
At the same time, spending is on the increase, as the shaky coalition government caves in to special interest groups, while Mr Berlusconi’s attempt to push through income tax cuts (albeit less than first mooted) will only exacerbate the problem. Structural reforms, such as that envisaged for pensions, are also immobilised due to political infighting.
As The Banker went to press, the resignation of Umberto Bossi, leader of the Northern League underlined the fragility of the ruling coalition. The fall of the current government would be no great loss and it might even improve the rating.
