ANALYSIS - Italy hopes thrift can fend off euro zone contagion

ROME (Reuters) - Italy pins its hopes of not being next in line for market turmoil like Greece, Spain and Portugal on steady management of its high debt and deficit in the global crisis and the private thrift underpinning its current account.

Before the financial crisis, Italy’s record of low growth and high debt made it a more obvious target for default fears than the likes of Portugal, Ireland, Greece and Spain and it got used to being called the laggard of the euro zone.

But it weathered the financial crisis with a stable fiscal position and its banks intact, leading traders to see the recent fall in its bond prices as a flight to quality away from all euro-zone peripherals rather than an Italian sell-off.

“The market of course will continue to suffer but I don’t think Italy will be the next target of speculative sales,” said one Italian debt trader who wished to remain anonymous.

The Italian-German 10-year government bond spread widened to 96 basis points on Friday, versus around 80 bps two months ago. But that compares to the current spread of 368 bps on Greek debt, reflecting the much higher perception of risk for Greece.

Similarly, the cost of insuring 10 million euros of Italian government debt against default rose to about 131,400 euros on Thursday -- compared to more than 400,000 euros for Greece.

One government source, speaking on condition of anonymity, said Italian spreads were rising because of investors buying up Bunds rather than focusing negatively on Italy.

Economy Minister Giulio Tremonti likes to remind Italy that it has “the third highest public debt in the world without having the world’s third biggest economy”.

“Cleary we are fragile and vulnerable to enter the eye of the storm, but there is no fundamental reason for that at the moment,” said the government source.

“If we became the centre of speculation we would scramble to respond but we have a reserve army of small savers who would enter the market en masse as soon as yields rose,” he said.

The percentage of Italian public debt in foreign hands is just 42 percent versus 77 percent for Greece and over 80 percent for Portugal, according to data from the end of 2009.


A research note by Unicredit said Italy was in a “class of its own: the combination of high private savings and prudent fiscal management in the recession put it in a significantly stronger position”.

Bank of Italy data from the end of 2008 putting household debts at 57 percent of disposable income compared to 93 percent in the euro zone on average and Unicredit chief economist Marco Valli said low private sector indebtedness kept Italy’s current account deficit “substantially below that of other countries that are under pressure now”.

Secondly, Valli said, “fiscal policy has been clearly more conservative” in 2009, when Tremonti showed more restraint than many of his European peers in paying for measures to stimulate growth and safeguard the banks.

Tremonti, who in a press interview last month cited these as Italy’s “two strengths” over its peers, had little choice, with a public deficit of 5.3 percent in 2009 and debt at 115 percent.

But Alexander Kockerbeck of Moody’s has said Italy benefits from being “more accustomed than other countries to managing high debt and low growth”, while OECD chief economist Pier Carlo Padoan told Reuters in mid-January that “Italy’s prudent fiscal policy is proving a precious commodity saving it from risk premiums which have shot up for countries like Greece”.

Italy has been in a relatively good position to withstand economic shocks because of Prime Minister Silvio Berlusconi’s strong majority and the relative absence of social unrest -- though more job losses this year, with firms like Fiat closing plants, will put pressure on the conservative leader.

Maria Cannata, head of debt management at the Treasury, told Reuters recently that Italy would issue less debt in 2010 -- just over 240 billion euros, 13 billion less than 2009 -- with debt maturity now the longest for three decades.

“Investors’ perception of Italy’s situation is now very different from a while ago and they no longer lump us together with other countries from the Mediterranean area,” she said.

“When talking about PIGS, the ‘I’ stands for Ireland, not Italy,” said the Unicredit note, referring to the unflattering acronym given to Portugal, Ireland, Greece and Spain.

Additional reporting by Ian Simpson, Giulio Piovaccari and Alessia Pe in Milan; Editing by Andy Bruce