Italy is the EU's second most indebted country

Italy's €2.3 trillion of debt is 132 percent of its gross domestic product (GDP), the highest ratio anywhere in Europe apart from Greece.

EU regulations suggest that the ratio should stay below 60 percent, but according to the Bank of Italy, since 1980 Italy's has exploded to its current rate from 54 percent.

How will it develop from here?

That depends on the policies that will be implemented by a new government.

The Oxford Economics Institute estimates that the basic income, drastic reduction of income tax and pension reform proposed by anti-establishment Five Star Movement and the nationalist, strongly eurosceptic League will cost €100 billion per year. This would lead to a rise in the country's deficit/GDP ratio, which would increase to 5.5 percent in 2019, compared to the 1.3 percent currently forecast by the institute. 

The institute believes this is unlikely, however, because of the expected reaction of the markets, the EU and Italian president Sergio Mattarella, who over the weekend underlined his ability to block laws that are unconstitutional.

The European Commission estimated at the beginning of May that Italy's public debt would amount to 130.7 percent of GDP in 2018 and 129.7 percent in 2019 if the country continues with its reforms.

A most 'Italian' debt

Erik Nielsen, chief economist of the Italian bank Unicredit, has noted that Italy's debt profile has “changed dramatically in recent years”. Half of it is now held by Italian creditors, and one third of that total by the country's
banks. Most of these domestic creditors are more stable than their foreign counterparts, who were the major holders of Italian debt in the past.

Another stable creditor, the European Central Bank (ECB), holds around 17 percent of the country's debt. Around a third of Italy's debt is still held by other foreign creditors, but this group is now much more stable than before and mainly contains institutional investors, including central banks.

Return of the 'spread'

The spread, as (almost) everyone knows in Italy, measures the difference between the country's borrowing rate with that of Germany, considered Europe's most solid and reliable economy. A spread of 100, for example, would mean that if Germany borrows at a rate of one percent, Italy would be borrowing at two percent.

On Wednesday the spread reached 151 points, a 20-point increase on the previous day that highlighted market uncertainty as to the economic measures that will be proposed by the Five Star/League alliance.

That, however, is a long way from the levels it reached at the peak of the financial crisis in November 2011, when the spread reached 575 points just before Silvio Berlusconi's government fell.

Turnaround?

Italy's recent governments have worked on lowering the country's debt by acting on its public deficit. At the beginning of May the European Commission estimated that if nothing changes economically Italy's deficit/GDP ratio would be 1.7 percent in 2018 and 2019, big drops from 2.3 percent in 2017 and 2.5 percent in 2016.

However, M5S leader Luigi Di Maio and League head Matteo Salvini have made it clear that they feel no need to respect European commitments in the implementation of their programme.

Di Maio, however, assured that Italy would remain below three percent, in line with the threshold set by the Stability Pact, but very far from the previous commitments of the Italian government. And to achieve this, the two leaders rely primarily on the return of growth, which they believe will be the new economic direction. 

READ ALSO: M5S and League agree contract for Italy's 'government of change'

Photo: Andreas Solaro/AFP