Italy is in serious financial trouble, but this is not a new issue. If you search "Will Italy Become the Next Greece," you will likely find articles going all the way back to 2010 or 2011. The country faces huge debt problems and is only one of three top 10 world economies to enter 2015 with a debt-to-GDP ratio above 100%.
Italian Prime Minister Matteo Renzi seems committed to stopping Italy's bleeding, showing more strength and resolve than Greece's embattled leaders did leading up to the Greek crisis. Renzi introduced a Jobs Act that offered tax deductions for investments, a bonus for low-income earners and reduced payroll taxes to encourage growth. Low oil prices have also helped, and Renzi promises the elimination of property taxes on first homes.
Critics in Italy and around the European Union (EU) are worried Renzi's plan will only add to Italy's enormous public debts. Some also fear the Prime Minister has done too little to face down corruption. Italy can scarcely afford more debt payments, as interest on its debt is more expensive than its entire public education budget.
What Does "The Next Greece" Mean?
The Greek crisis refers to a multiyear period of depressed economic conditions, structural weakness and untenable government debt levels. The first stage began in 2009, when the fast-growing Greek economy abruptly reversed course and hinted at severe recession. The next several years were a circus of tax collection problems and failed attempts by Greece's government to hide data from the European Union, including hundreds of millions of dollars in shady swaps paid to Goldman Sachs and other leading banks to skew debt figures.
Credit rating agencies responded quickly once Greece's debt problems became public, downgrading Greek public bonds to junk status in 2010. The EU agreed to bail out Greece in exchange for strict spending restrictions and policy reforms. On July 5, 2015, the Greek people voted to reject the bailout, leaving the economy in depression and the country's future uncertain heading into 2016.
Italian Banking and Debt Crisis
Italy did not have to bail out its banking sector after the Great Recession, which meant Italian taxpayers were not writing huge checks to big corporations like the U.S. Unfortunately, those Italian banks wasted their positions of relative strength by making bad loans.
Data from the European Central Bank (ECB) shows the percentage of nonperforming loans from Italian issuers rose from less than 5% in 2008 to almost 14% in 2015. Bad debt in 2015 grew over $370 billion, which is greater than one-fifth of Italy's GDP. The country's government spent more than $3.9 billion in 2015 rescuing four banks, and some experts predict more bailouts will come. A proposal to force large banks to reorganize into joint-stock companies received mixed responses.
In the meantime, lending to nonfinancial firms in Italy declined more than 10% from 2008 to 2015. If the banking sector does not recover, tax revenue and GDP are expected to fall. Italy entered 2015 with a debt-to-GDP ratio of 133%, the second worst in the European Union after Greece. This could mean mounting pressure to exit the EU, since Germany probably will not weaken the euro to help its neighbor.
European Countries Racing Toward Default
Italy is not the only major European nation staring down a Greek-like crisis. Ireland, Portugal and Spain face mounting debt and low growth. Spain carries the most public debt of the three and has worse employment figures than Italy. More than 50% of young Spaniards were unemployed in 2015.
Italy faces severe problems, although it may not be the first country to face the same tough decisions as Greece. Much depends on the political will of Italy's leaders, the EU monetary alliance's viability and the West's exposure to Italian banks. Fortunately for Italy, European and American banks are six times more exposed to Italy than Greece, according to 2014 data, which makes it more likely outside help could mobilize.