„Die Krise um Italien ist allerdings ein komplett anderes Paar Schuhe“, sagt Riddell. „Mit 2‘000 Mrd. Euro Schulden ist Italien das Land mit der dritthöchsten Verschuldung weltweit. Es hat viermal mehr Schulden als Lehman Brothers. Ein Staatsbankrott wäre zwanzig Mal grösser als jener von Argentinien. Zudem würde ein Zahlungsausfall des Staates voraussichtlich auch zum Ausfall der italienischen Banken führen.“
Die italienische Wirtschaft ist laut Riddell derzeit in einer sehr schlechten Verfassung. Aus diesem Grund wäre auch eine Rettung im Stile von Griechenland keine längerfristige Lösung, argumentiert Riddell: „Wir würden auf die schlimmste jemals gesehene Finanzkrise blicken und die wirtschaftliche Depression beträfe die ganze Welt.“ Dieses Armageddon könne mittels der Schaffung einer Eurozone-Fiskalunion oder durch eine Geldmengenausweitung der EZB vermieden werden.
Why you should be extremely worried about an Italian government bond selloff Financial markets are massively underestimating the scale of the problem and the downside risks in Italy in my opinion. To explain why, it’s necessary to put the size of the Italian bond market into context.
In 2001, global financial markets were violently shaken when Argentina defaulted on US$95bn of sovereign debt, which remains to this day the biggest ever sovereign default. Latin American economies were plunged into chaos and Brazil only narrowly avoided default thanks to a large bailout from the IMF.
In 2008, the collapse of Lehman Brothers, the biggest ever corporate bankruptcy, sparked the most severe financial crisis since the Great Depression. Lehman Brothers had US$613bn of liabilities.¨This year it has been the turn of Greece to wobble financial markets. Greek government debt levels are rising rapidly, and including its bailout loans, Greece has almost €350bn or US$480bn of debt outstanding.
But Italy is a whole new ball game. Italy is the third most indebted country in the world with debts just shy of €2tn, or US$2.5tn. Italy has four times as much debt as Lehman Brothers. An Italian default would be 20 times the size of Argentina’s. If the Italian sovereign defaulted then presumably Italian banks would, too. Unicredit, which is Italy’s largest bank by assets, has twice as much debt as Lehman Brothers had.
The risk of an Italian default is getting alarmingly high. If Italy wants to borrow for two years, then the interest rate that it has to pay is 6.5% per year, versus about 0.5% in Germany and the UK. If Italy wants to borrow for more than 5 years, then it has to pay interest of over 7% per year.
Borrowing costs this high are utterly unsustainable for Italy unless it can generate supersonic growth rates, but Italian growth prospects are very poor. Indeed, Italy had weak growth even before the financial crisis - Italian GDP measured on a per capita basis has been negative since the late 1990s and only a small handful of countries including Zimbabwe and Haiti have fared worse. And recent economic data gives a strong indication that Italy has again sunk into a deep recession.
Italy is on the cusp of needing a bailout, but even if we assume Italy isn’t too big to bail out, it’s worth remembering that a bailout isn’t a cash gift, it’s a loan that gets added to the country’s debt pile. As Greece is finding out, the extra debt and enforced austerity that accompanies the bailout doesn’t help when a country is experiencing solvency problems. If Italy goes the way of Greece we would be staring at the worst financial crisis ever seen, and with European banks large lenders outside of Europe, the economic depression would be global in scale.
Armageddon can be avoided in two ways. Complete fiscal union within the Eurozone, but this requires both Northern Europe to take responsibility for Southern Europe’s debts, and for Southern Europe to give up all sovereignty, both of which look increasingly unlikely. Or the ECB can start printing money, which would be good for the debtors (Southern Europe) as debt levels will be eroded away, but Northern Europeans -the creditor nations – are fiercely resistant since their savings will be inflated away.
How can investors protect themselves? In my view, the best quality AAA rated governments are as good a place to hide as any. In the likely event that central banks turn on the printing press, it also makes sense to have inflation protection. Surprisingly, inflation linked bonds are pricing in very little inflation and therefore appear cheap to us, and across our range of bond funds we have varying degrees of inflation linked bond exposure where mandates allow.
