Expert: Italy may create a global issue (E24)

05 Aug 2011

If country like Italy will encounter difficulties with repaying its debt obligations, it will become a real global issue, with very far-reaching impact, said andrei Zaborski, the investment manager of asset management firm Redgate Capital.

“Italy has a total debt of 1,6 trillion euros, what is the third largest in the world, after US and Japan,” noticed Zaborski. “Italy’s case is much more difficult as their debt-to-GDP ratio is extremely high – more than 120% – coming just after Greece,” he added. In comparison Zaborski brought USA, where the total federal debt is just above 70% of GDP.

In some extent the rise of bond yields is due to the irrational panic, spreading among the investors, stated Zaborski. “At the moment we have strong flow of bad news, especially from the USA,” he said, pointing on debt ceiling issue of the States.

At the same time the situation in Italy and in Spain also gives enough reason to be worried. “The yields of Spanish bonds spiked up already in the end of last year, as the discussion started around the weak standing of Spanish community banks and their capital requirements,” told Zaborski. “In July Italian bond yields were also pushed by the budget vote in the parliament – fortunately the opposition backed government’s austerity plan, but the elevated discussion was enough to bring out the subject globally.”

“The market is very much driven by the actions of rating agencies: Moody’s announced on 29th of July, that Spain’s sovereign credit rating is under review for potential downgrade,” added Zaborski.   

“The primary objective for the governments is to acknowledge the debt issue, start working on reducing next years’ budget deficit, holding on to austerity measures and to take firm direction towards reducing the debt load,” explained Zaborski. “On the 20th of July the leaders of EU expressed the same ideas, by promising to reduce countries’ budget deficits below 3% [of GDP] by 2013; Italy even promised to reach the 3% target by 2012 and achieve balanced budget by 2014. Now it is time to carry on all that has been said. But certainly it will not happen in a day.”

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