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Bank of Italy released the government debt statistics for June. As always a few entries are not quite up to date but they still allow for some important conclusions.

Table 5 includes monthly statistics by holding sector. ‘Resident MFIs’ increased their holdings during 2012 from €515,58bn in December 2011 to €607,69bn in May (+€92.11bn), ‘Other Resident Financial Institutions’ from €291,48bn to €315.21bn (+€23.73bn) and ‘Other Residents’ from €261.87bn to €333.91bn in April (+€72.04bn). It is clear that resident MFIs and other residents were the main drivers of the increase in resident holdings of Italian government debt. On the other hand, ‘Non Residents’ decreased their holdings from €739.51bn to €619.34bn in April (-€120.17bn or 16% of their holdings). In December 2011 residents held 61% of total government debt while in April the percentage increased to 68%, a change of more than 6% in 4 months time.

Overall, government debt increased by €75.06bn during the first half of 2012, compared with €58.76bn in the first half of 2011 and €55.74bn for the whole of 2011, an increase of more than 4.75% of GDP from 120.1% to 124.9% GDP. Given the fact that Italy is already in a deep recession (with quarterly GDP dropping 0.7-0.8% in 2012Q1 and Q2) government debt is on a path to quickly reach 130% of GDP (although around 6% will be held by Bank of Italy).

Based on OECD data, if this pattern of a loss of 0.7% of GDP quarterly continues, Italy will be back to 2001 GDP levels by the end of 2012 and pre-Euro in the mid-2013.

Edward Hugh had an excellent article a few months ago on Spanish government debt details. It analyzes debt dynamics, especially debt not included in the official Excessive Deficit Procedure framework. The clear conclusion is that actual debt (obligations) is much higher than the official numbers and can quickly push the debt ratio closer to 100% of GDP.

More specifically:

  • Although official government debt is €774.5bn (which based on a €1074bn 2011 GDP would amount to 72.1% GDP), actual liabilities (a quarter earlier) were €932.2bn while the official debt increased by almost €40bn since then.
  • A large part of the difference can be accounted for unpaid bills (longer than 30 days) which, according to latest data amount to €100.4bn in 2011Q4 and have been on a serious growth path all the way through 2011 (from €64.4bn at the start of 2011, a change of €36bn).
  • Another non-consolidated sector is debt owed by public companies, which (thankfully) is rather steady at €55bn in 2012Q1.
  • Hugh suggests that  €65bn of debt held by the social security reserve fund should also be counted as government debt (since as in the case of Greece the government would ultimately bear this liability in one form or another). In any case, one could argue that as long as the fund rolls over this debt (and earns the large interest of current debt issues) there should be no real problem.
  • A large problem is the level of government guaranteed (private) debt, which is now (2012Q1) at a level of €131.7bn (or 12.3% GDP), compared with €83.5bn at the start of 2011. Most of the increase can be attributed to guarantees provided by the government to banks in order to borrow funds through the 3Y-LTROs facilities of the ECB. One could probably argue that this liability will not need to be paid by the government but (on the other hand) be reflected as bank recapitalization if needed and ultimately count as government debt through the FROB.
  • Hugh also raises serious issues about other government entities as well with some very sound arguments. I don’t feel qualified to comment on this subject.

If one were to add the official EDP debt to unpaid bills and public companies debt, the total is close to €930bn, or 86.6% GDP (2011). If the total of 100bn bank recapitalization loan is used and this year’s deficit and negative GDP growth is included, it becomes quite clear that even at the end of 2012 total government liabilities will be over 100% GDP. Based on this fact, recent Spanish debt yield dynamics are quite reasonable since it appears rather likely that a debt restructuring of some sort will be needed in the medium-term (end 2013 – 2014).

Current government debt interest rates are over 4%. If that is coupled with a negative GDP growth and low inflation environment during the coming years, a debt ratio of much larger higher than 100% GDP will clearly make debt servicing rather unsustainable and require reductions at least in interest rate payments.

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Kostas Kalevras

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