Does Gold Speak Italian?

Nobody Expects the Italian Inquisition

The recent days have been quite tumultuous in Italy. The turmoil started last week when the new government submitted its spending plans to the EU. The ruling coalition set Italy’s budget deficit at 2.4 percent of its GDP. The number is much higher than the current deficit which is set to be 1.5 percent of the GDP. The proposed difference between spending and revenue is also higher than 1.6 percent proposed by the country’s finance minister Giovanni Tria. So the number was above the expectations. Actually, it came as a shock, especially that the International Monetary Fund has projected it to fall to 0.9 percent in 2019. Well, nobody expected the Italian Inquisition.

Is Italy the New Greece?

Hence, the markets balked. Investors started to worry that Italy could be the next Greece. These fears are not unfounded, given Italian’s grim fiscal position. As the chart below shows, the country has run a budget deficit consistently over the past 20 years.

_{Chart 1: Italy’s fiscal deficits (as a % of GDP) since 1995.}

The inevitable consequence of the accumulation of deficits is the sky-high level of public debt in Italy. It already surpasses the country’s annual production being at 130 percent of the GDP. Only a few countries hold higher ratios of debt to GDP (yeah, Greece is within that elite club). And it goes without saying that the increase in the budget deficit will not help to reduce that enormous indebtedness.

_{Chart 2: Italy’s public debt (as % of GDP) since 1988.}

Not surprisingly, investors panicked and started to sell Italian bonds. After all, Italy is not the small Greece, but the eurozone’s third-largest economy and the EU’s fourth-largest economy, which accounts for about 11.3 percent of the union’s GDP. Thus, the Italian bond yields surged, as the chart below shows.