I'm more or less convinced that the next crisis in Europe is going to be caused by the kitchen sink. Lately, weaker financial systems in the European Union have been toppling like dominoes and the European Financial Stability Facility has thrown everything it can, save for the kitchen sink, at aiding these failing financial systems.
Well, now we can officially add Italy to that list of concerns with its 10-year lending rate peaking last week at 7.48%, an all-time high since the country entered the EU. Many have felt that Greece, Ireland, and Portugal represented unique situations and that, even with its high debt-to-GDP levels, Italy would be able to escape the ignominy of being the first major component of the EU to run into major economic troubles. Now all that conjecturing appears to be nothing more than wishful thinking.
Faced with the dire reality that Italy may need the help of the EU, I've compiled a list of 10 startling figures that demonstrate why Italy is in the mess that it's in and why these figures should make investors quake in their boots. I've broken down the list into two parts because it would have been a 10-page manifesto on what's wrong with Italy otherwise. Here are the first five.
284 basis points: Looking back precisely one year ago today, Italy was able to borrow at a rate of 4.22% on a 10-year government note. Based on today's current rate of 7.06%, Italy is now paying 284 basis points more to borrow money than it was last year. Keep in mind that Portugal and Ireland both had to cave in to the pressures of insurmountably high lending rates when they crossed 7% and seek EU assistance. Therefore, the 7% lending level for 10-year notes is seen as a key level, and I'm fairly certain Italy will not be able to survive long and meet its interest payments if this rate stays above 7% for any significant length of time. Two-, five-, 10-, and 30-year yields are all floating between 6.5% and 7.5%, and a flattening yield curve is never a good sign.
8.3%: One thing painfully obvious about the EU is that many of its troubled countries have brutally high unemployment rates -- and Italy is no different. Based on its latest reported figures for September, unemployment levels ticked up to 8.3%. While this is nowhere near the highs of 11.5% experienced in 1998, it does mark one of the highest levels seen since early 2004. Italy's own constitution is at fault for contributing to these high unemployment levels, as it calls for guaranteed unemployment benefits for citizens who have worked at least 12 months in a rolling 24-month period. In addition, certain provisions set forth in Italy's constitution allow it to relieve small and medium-sized business of much of the cost of paying for an unemployed worker, further exacerbating its public debt problem since nearly all costs fall on the state.
3.4%: The last thing Italy should be dealing with right now considering its attempt to pass money-saving austerity packages is rising prices. But since when has anything gone according to plan in this region lately? Since bordering on deflation during the depths of the 2009 lows, consumer prices have roared back with a vengeance and, according to the most recent data, jumped by 3.4% in October.
Source: TradingEconomics.com, ISTAT.
This marks the highest rate of inflation since mid-2008 and is well above Italy's historical average of around 2% over the past 15 years. With wages only growing at roughly 2% annually, the disconnect between consumers' pockets and their wages is only going to grow -- as will their discontent with the current Italian government.
119%: Perhaps the only thing more disconcerting than the prospect of another bailout is knowing that Italy holds more debt than Spain, Greece, Portugal, and Ireland... combined. The more than $1.6 trillion in debt equates to 119% of Italy's GDP based on its most recent figures. European banks have $999 billion (with a "b") exposure to Italian debt, with U.S. banks coming in a distant, but not unsubstantial, second with $269 billion in exposure, according to Barclays. Italian bank Intesa tops the list of exposure in Europe with more than 60 billion euro, but Deutsche Bank
46.5%: Not to harp on Italian unemployment any more than I already have, but this inconspicuous figure represents the current unemployment rate for those in Italy who chose to receive only a primary education. This compares to an unemployment rate of just 11.3% for those in Italy with a tertiary education level. It might seem efficient that those who attained higher levels of education are getting the jobs, but it also reinforces one of the primary problems with the Italian job market: There's no fluidity. Youth unemployment (ages 15-24) of 21.3% only backs up the fact that older-generation workers are keeping their jobs longer and room for advancement simply isn't there. This pattern isn't a huge problem now, but it creates a job and education gap that simply can't be solved easily down the road.
Stay tuned for Part 2 later this week, where I'll reveal five more startling figures about Italy.
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