The 8th Largest Economy In The World Is Being Overwhelmed By A Tsunami Of Debt (EWI, EWP, EWG, VGK, EUO)
Guess who is going to need a bailout right after Spain (NYSEARCA:EWP)? The Italian economy is the 8th largest economy on the entire planet and right now it is being absolutely overwhelmed by a tsunami of debt. In an attempt to address this problem, Italy (NYSEARCA:EWI) is going down the exact same path that Greece, Portugal and Spain have gone. And so far, we are seeing the exact same results that we have seen in those other countries. Austerity causes economic growth to slow down, and that causes unemployment to soar. When unemployment rises, tax revenues go down and you end up missing your original deficit reduction targets so you have to implement even more austerity measures. It is a vicious cycle that we have seen play out again and again in Greece over the past five years. But unlike Greece, Italy is way too large to be completely bailed out. The truth is that there are only 7 economies on the entire globe that are larger than the Italian economy. Plus, keep in mind that the 12th largest economy in the world, Spain, is also on the verge of formally requesting a bailout. So needless to say, Europe is rapidly approaching a moment of reckoning.
Just like in Greece, Portugal and Spain, the situation in Italy continues to deteriorate.
If Italy continues to go down the path that Greece has gone, Italy will soon find itself in the middle of a rip-roaring depression.
Sadly, at this point it is hard to imagine any way that outcome is going to be averted.
The following are 10 signs that the 8th largest economy in the world is being overwhelmed by a tsunami of debt….
#2 Despite all of the austerity measures that have been implemented, the Italian government had a budget deficit during the first half of this year that was more than a billion dollars larger than the budget deficit during the same period last year.
#3 The Italian economy contacted by 0.7 percent during the second quarter.
#4 Overall, the Italian economy has shrunk a total of 2.5 percent over the past 12 months.
#5 The unemployment rate in Italy rose to 10.8 percent in June.
#6 The number of unemployed workers in Italy is more than 37 percent higher than it was last year.
#7 Despite a tremendous amount of intervention by the European Central Bank, the yield on 10 year Italian bonds remains up around 6 percent.
#8 Even though Italy has implemented a vast array of austerity measures, the debt of the Italian government continues to explode. The following is from a recent Zero Hedge article….
What is perhaps most stunning, given all the talk of austerity, cutting back, reforms, and change is that the size of this debt is growing at an ever-increasing pace that is simply stunning. Pre-Euro (1999), Italy’s debt was growing at a rate of just less than EUR 2 billion per month; in the eight years from then until the crisis in 2008, Italy’s pace of debt growth (fostered we are sure by the convergent cheapness of funding and their immutable belief in invincibility) almost perfectly doubled to EUR 3.8bn per month. Since 2008, and the onset of excess Keynesian ridicule we assume, Italy’s debt load has grown at a stunning pace of EUR 6.4 billion per month and perhaps most incredible; however, the last nine-months (since the peak ‘peak’ of the crisis in September of last year) has seen the pace of debt-load growth surge to EUR 9.5 billion per month.
#9 According to RT, the Italian government and local governments around Italy plan to sell off hundreds of historic buildings in a desperate effort to raise cash….
The city of Venice is going to sell 18 properties, including the 18th century Diedo Palace, which served as a criminal court for years. The price tag for the palace is 19 million euro. Milan intends to sell more than 100 buildings, including the Palazzo Bolis Gualdo. The city hopes to get as much as 31 million euro for that palace.
#10 The national government of Italy is not the only one that is drowning in debt. All over Italy, local governments are experiencing major debt problems as well. In fact, the other day came a warning that ten large Italian cities are nowon the verge of bankruptcy….
The cities at risk of running out of money include Naples, Palermo in Sicily and Reggio Calabria, on the toe of the Italian boot, according to the Italian press.
“The situation is becoming worse by the day,” said Graziano Del Rio, the president of a national association of municipal councils.
The warning came just days after Mario Monti, the prime minister, expressed fears that Sicily, which has a high degree of fiscal autonomy, was on the brink of a default.
At this point many in the financial community have completely written off southern Europe. Financial capital is absolutely flying out of countries such as Greece, Spain and Italy right now.
So what is next for Spain and Italy?
You can look at what is still unfolding in Greece for some clues.
The Greek economy is experiencing a full-blown depression at the moment. The Greek economy contracted at a 6.2 percent annual rate in the second quarter, and the unemployment rate is now over 23 percent.
Greece has implemented wave after wave of austerity measures, and yet the rest of Europe keeps demanding even more from Greece.
According to Reuters, Germany (NYSEARCA:EWG) is now threatening to cut off aid to Greece if Greece does not strictly adhere to the conditions that have been imposed upon them….
A senior member of Chancellor Angela Merkel’s party issued a stark warning to Greece on Monday, saying Germany would not hesitate to veto further aid to the country if there were any signs it was not meeting the conditions of its bailout.
The comments, by the deputy parliamentary leader of Merkel’s Christian Democrats (CDU) Michael Fuchs, are a sign that frustration with Greece among ruling party lawmakers is nearing the breaking point.
So is that where Spain and Italy are headed?
Or will the eurozone (NYSEARCA:VGK) simply implode and break up at some point?
As I have written about previously, the only way out of this mess for Spain and Italy in the long run is for Germany to allow the European Central Bank to print up trillions of new euros and use those euros to buy up massive amounts of Spanish and Italian debt.
But there is a tremendous amount of resistance to this idea in northern Europe.
First of all, many northern Europeans find the idea that they should experience rampant inflation just so that Spain and Italy can borrow lots more money very cheaply extremely repulsive.
Secondly, if the ECB is going to start essentially monetizing the debt of Spain and Italy then the ECB will eventually have to start doing it for everyone.
The head of Belgium’s central bank says that it makes “no sense” for the ECB to buy up Spanish and Italian debt, and there are a whole host of other politicians in northern Europe that feel the exact same way.
But if Italy and Spain are allowed to fail, it is going to have a catastrophic impact on the entire global financial system.
Financial journalist Ambrose Evans-Pritchard recently described what he believes may happen if Italy and Spain are permitted to collapse….
Failure to halt a full-blown debt debacle in Spain and Italy at this delicate juncture – with China, India and Brazil by now in the grip of a broken credit cycle and the US on the cusp of fresh recession even before the “fiscal cliff” hits – would tip the entire global system into a downward spin, triggering the sort of feedback loop that caused such havoc in late 2008.
So what comes next?
Well, on September 12th the Constitutional Court in Germany is expected to issue a ruling on whether the ESM and the recent fiscal treaty are legal under the German constitution.
If the court rules that they are not, all hell is going to break loose.
If the court rules in favor of the ESM and the fiscal treaty, it will just delay the inevitable collapse for a little while.
Either way, Europe (NYSEARCA:EUO) is heading for a massive amount of pain.
Michael has an undergraduate degree in Commerce from the University of Virginia and a law degree from the University of Florida law school. He also has an LLM from the University of Florida law school. Michael has worked for some of the largest law firms in Washington D.C., but now is mostly focus on trying to make a difference in the world.