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Spain and Italy's Debt

The trigger for Ireland’s bail-out was not the sovereign’s inability to borrow (it is funded well into 2011), it was the inability of Irish banks to refinance their borrowing in the wholesale markets.

Could Spanish and Italian banks face a similar problem?

Barclays Capital reckons that combined, the Spanish sovereign and Spanish banks need to raise €73bn in the first four months of 2011, some half of it in April alone.

Capital Economics estimates a Greek/Irish-style bail-out for Spain (which accounts for 11 per cent of the eurozone economy) would require €420bn of funding. That would stretch the EU’s financing capacity to breaking point.

As for Italy, its economy is in the doldrums.  Debt to gross domestic product will be about 118% this year (2010).  It faces over €300bn of financing (sovereign plus bank) in 2011, a third of it in the first three months. Italian banks are undercapitalised relative to peers, and have little capacity to generate internal capital.

On a positive note, Italy is one of the few large economies with a stable debt level. State finances are relatively robust, with a budget deficit of only 5 per cent (lower than the eurozone as a whole), relatively low private sector indebtedness, and a high proportion of domestic ownership of Italian bonds. Its public finances are well managed, and the treasury has resisted pressure to pump up spending.

Reference:

  1. Financial Times, 20101126, “Hispanic Station”
  2. Financial Times, 20101130, “Italy: victim or suspect?”