Back of the envelope on Italy

REVISED: Here’s a back of the envelope calculation on Italy, highlighting the impact that a rise in financing costs coupled with a lack of growth can have on their finances. Italy needs to refinance about 310b euros of debt in 2012. I estimate the average interest rate they are paying on this maturing debt is 2.7% (short term rates collapsed in ’09-’10). With an average debt maturity of 7 years, Italy may be paying 6%+ on the refinancing. Assuming a 350 bps additional cost times the 310b euros of maturing debt, this adds 10.9b euros of interest expense to the 54b euros of interest payments scheduled to be made in 2012. At the same time, Italy’s 2T economy is expected to grow REAL GDP.1% in 2012 and nominal around 3%. Thus, nominally 60b euros will be added to their economy with all of the incremental gain thus going to service interest expense. This also doesn’t take into account any new debt Italy has to take on over and above what is maturing. Over time, just to tread water, any country needs to generate nominal GDP growth equal to its financing costs. In the 10 years prior to the sharp ’08-’09 economic contraction, Italy saw nominal GDP growth of 3.7% (REAL averaged 1.3%), near its financing costs over that time period. A continuation of nominal GDP growth of 3.5-4% (now mostly consisting of inflation) will no longer cut it for Italy with funding costs at current levels.

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