Is Italy Nearing a Financial Meltdown?

( – In an op-ed at The Hill, American Enterprise Institute’s Desmond Lachman suggests that Italy may be making the same mistakes that Greece did over a decade ago when its sovereign debt crisis shook the world financial markets and forced Greece to default on its loans.

According to Lachman, a similar sovereign debt crisis in Italy would lead to significant consequences for the world markets since Italy’s economy and government bond market are ten times the size of Greece’s.

Lachman writes that there is a distinct deterioration in Italy’s public debt fundamentals that could give way to a rise in its debt service payments.

Currently, Italy’s public debt is at 145 percent of its Gross Domestic Product. That is 15 points higher than where it was at the time of Italy’s last sovereign debt crisis in 2012.

Meanwhile, 10-year bond yields in Italy have risen from less than a percent in 2021 to about 4 and 3/4 percent today. At this current rate, it is unlikely that Italy could grow its way out of its debt burden, especially considering the country’s poor track record for economic growth.

Additionally, Lachman writes that Italy appears to be following Germany into recession due to the tightening of the European Central Bank’s monetary policy. And since the European Central Bank has shifted to quantitative tightening, it is no longer helping Italy through quantitative easing, limiting the likelihood of the ECB purchasing Italian bonds. This will require the Italian government to turn to the markets to meet its borrowing needs, likely at a higher interest rate.

Lachman also notes that the Italian bond market is also clouded by the erratic policies of Italian Prime Minister Giorgia Meloni.

According to Lachman, Meloni’s proposed market reforms and windfall profit tax on banks are unlikely to inspire confidence in the government’s ability to face a possible debt crisis.

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