Italy's accounts are destined to worsen and speculation on our country's public debt risks infecting the market for other European sovereign bonds as well. It is a gloomy picture painted by the International Monetary Fund, which in its latest "Report on global financial stability", published today on the occasion of the annual meetings underway in Bali, returns to speak of "Italy risk".
According to the IMF, "the uncertainty about fiscal policies has brought attention back to the connection between banks and sovereign risk, an important risk transmission channel".
If the market's concerns about fiscal policies were to re-emerge, "there is a risk of a rekindling of the bond between government bonds and banks in Italy due to the government bonds in the portfolios of Italian banks and due to their exposure to the domestic economy – continues the Report – In such a scenario, market tensions may spread to other sovereign bond markets in Europe, as happened during the sovereign debt crisis”.
ITALY DEBT/GDP: ESTIMATIONS WORSEN, BEHIND ONLY JAPAN AND GREECE
The Fund has worsened its forecasts on the debt-to-GDP ratio in Italy between 2018 and 2023. After closing 2017 at 131,8%, the figure should fall to 130,3% in 2018 and no longer at 129,7%, as previously estimated. In 2019, on the other hand, a drop to 128,7% and no longer to 127,5% is expected. The institute led by Christine Lagarde estimates a figure of 2020% for 127,6 (higher than the 124,9% expected last spring); for 2021 to 126,7% (the estimate was 122,1%) and for 2022 to 125,8% (from 119,3%). Finally, for 2023 (the year in which the Fund's calculations stop) the forecast is equal to 125,1% and no longer the 116,6% calculated in the spring.
In 2017, the only countries in the world to have done worse than Italy were Japan, with a debt/GDP ratio of 237,6%, and Greece, with 181,8%. Portugal is better than Italy (125,7%).
ITALY NEEDS "CREDIBLE AND REMARKABLE" CONSOLIDATION
In terms of fiscal policy, the Fund believes that Italy needs "credible and significant consolidation in the medium term, necessary to safeguard the public finances and put the debt/GDP ratio firmly on a downward path". This was stated by Vitor Gaspar, the director of the Fiscal Affairs department of the International Monetary Fund.
ECONOMIC EXPANSION WON'T LAST, RISKS CLOSER: BE PREPARED
The risks, however, do not only concern Italy. The current expansion of the economy “won't last forever – continued Gaspar – The risks are approaching and some have already materialized: it is time to use the cyclical expansion to create the fiscal space to be able to better face the next crisis”.
NEXT CRISIS COULD BE TRIGGERED BY JUMP IN US INFLATION AND BREXIT
And what could this next crisis be triggered by? According to the IMF, the most probable causes are two: a hard Brexit or an unexpected jump in inflation in the US which would force the Federal Reserve to raise rates faster than expected. It was Tobias Adrian, director of the International Monetary Fund's Monetary and Capital Markets Department, who said so.
In detail, the expert listed the three vulnerabilities. The first is given by the level of debt in the non-financial sector, which has reached around "250% of GDP". The second is linked to a "deterioration" in loan and mortgage underwriting standards even though banks "are safer" than 10 years ago, when the worst financial crisis erupted since the Great Depression in the 30s. The third vulnerability, continued Adrian, is linked to China where "the debt race has been particularly fast" and where there is the problem of shadow banking. The Beijing authorities "know they represent a risk and have acted with measures that we support".
