How Italy is Like a 1st-Year University Student

Like many 1st year university students away from home for the first time, Italy is facing the consequences of a series of poor credit decisions. While most students understand and appreciate how to manage personal debt, others find the collection of credit card application forms typically included in the ubiquitous new student welcoming packages to be too tempting. For these unfortunates, difficult lessons lie ahead.

In the same way, Italy is about to come face-to-face with its own dubious credit history.

For months now, investors have made known how they feel about the chances that Italy will be able to meet its future obligations. Wednesday marked the third consecutive day where yields on Italian debt rose to a new euro-era record with ten-year yields jumping more than a full percent to trade at 7.45 percent. The yield on shorter debt rose even more climbing 1.19 percent to 7.3 percent on two-year bonds.

Despite being forced to offer a premium of more than 300 percent, Italy must continue to entice investors to extend further credit. Simply put, Italy is obligated to borrow funds in order to cover its operating costs – a good portion of which includes the repayment of maturing debt. In other words, Italy, is using one credit card to make the minimum payments on its other credit cards.

Italy’s government has pledged to reduce spending and increase revenues by hiking taxes. However, as we know from watching Greece deal with its own deficit issues, committing to such a pledge is the easy part. Gathering the courage to pass the required legislation and actually implement a program even as public protests and political oppositions grows in intensity – well, that’s a different matter.

Just ask former Greek Prime Minister George Papandreou.

Source: IMF World Economic Outlook

Greece 2011 GDP – estimated $312 billion
Italy 2011 GDP – estimated $2.05 trillion

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