Italy’s Budget Sparks New Eurozone Fears

It could be the story you wished you paid attention to.

On Friday, it emerged that Italy’s upcoming budget would blowout their debt even further.

Instead of a budget deficit that would be set at 1.6% of GDP, the leaders of the ruling coalition party have dramatically increased this to 2.4% of GDP.

This sizable uptick in future debt lead to Eurozone markets taking a fall on Friday, with markets set to reopen soon.

Italy’s main FTSE MIB stock index fell 3.7% on Friday, one of its worst returns since June 2016.

Previous experience with Greece has some market watchers worried if Italy is next.

Italy’s economy is looking Greece-like

Italy is no stranger to debt with its debt-to-GDP ratio currently sitting at 130% of GDP.

Greece had a debt-to-GDP ratio of 109% in 2008, and we all know how that story went.

Italy for example, already outspends Greece on social welfare spending according to the OECD.

In effect, it is spending like a Scandinavian country without having the economy to back it up.

Meanwhile, the recent bridge collapse tragedy in Genoa has brought attention to the country’s aging infrastructure.

Spending in the new budget will focus on improving infrastructure and increasing welfare payments.

At the same time, they plan to cut taxes!

The coalition government, comprised of the conservative Lega Nord and the populist centre-left Five Star Movement, ran for election on an anti-austerity platform.

In essence this amounts to Italy pulling out the credit card again and it could have wide ranging impacts in Europe, potentially even reaching Australia.

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Why Italy’s budget matters to Australians

This is how it could play out for Australians.

Italy over the coming years almost defaults on its debts like Greece threatened to do.

This would trigger a crisis of monumental proportions.

This crisis would eclipse the Greek crisis because Italy’s GDP is 10-times as large as Greece’s.

Propping up the Italian government would be a task too great for the EU to handle.

It would lead to a splintering of the EU and the death of the Euro.

Poorer Southern European countries like Spain, Greece and Italy would return to their old currencies to attempt to get a handle on their debt.

Meanwhile, one of the world’s greatest financial crises would play out as Italy’s banks go under.

While at last measurement, the Australian banking sector’s exposure to foreign debt is a modest 2.7% of total assets. The real pressure would begin when major foreign banks begin to deleverage in the Australian market.

This would suck money out of the Australian economy, sapping growth.

The RBA has little room to move with interest rates at historic lows, leaving it with no choice but to accept slow growth.

Finally, it is worth noting that our banking sector now accounts for 25% of the total ASX 200 index.

That is a top-heavy number.

It will start with Italian banks and wind up hitting Australian banks hard.

When this happens interest rates will go up, and people could default on mortgages.

A scary picture indeed — Italy is playing with fire.

Ryan Clarson-Ledward

For Markets & Money

PS: If you want to protect your family wealth, you need to know why this financial expert is predicting economic collapse. Find out more.

Ryan Clarkson-Ledward is a junior analyst for Markets & Money. Ryan has degrees in both communication and international business. His priority is bringing you the latest price updates on stocks through ASX updates, as well as supporting Sam Volkering with background research. As part of the team at Markets & Money his aim is to provide unbiased and relevant news for readers. Ryan’s work with Sam is designed to provide research that complements Sam’s analysis for small-cap and technology stocks. Together, their objective is to break through all the jargon and give you the hard facts to inform your investment decision-making. Ryan writes for:

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