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Ten years on, Italy faces debt crisis Draghi may not solve - 15.07.22

Updated: Jul 16, 2022

By Francesco Canepa and Gavin Jones for Reuters

FRANKFURT/ROME, July 15 (Reuters) - Ten years after Mario Draghi's "whatever it takes" pledge saved the euro, Italy is once again in the middle of a debt crisis - but the country's prime minister and former head of the European Central Bank may struggle to solve this one.

Just like a decade ago, investors are questioning whether some euro zone countries can continue to roll over their public debts, which have ballooned during the pandemic and are becoming more expensive to refinance as the ECB prepares to raise interest rates.

This time, however, the epicentre of the crisis is Italy's secular lack of economic growth, rather than the financial excesses that landed Greece, Portugal, Ireland and Spain in trouble 10 years ago.

The situation for Italy has just become a lot more unstable.

Draghi offered to resign on Thursday after one of the parties in his fractious coalition refused to back him in a confidence vote, only to have his resignation rejected by the head of state. Draghi is due to address parliament on Wednesday with his future still in the balance. read more

Italy's benchmark 10-year yield rose to a high of 3.5% on Thursday and the spread over safer German Bunds widened to 227 points by the close, having more than doubled since the start of the year.

"Things just got worse; how much worse is difficult to tell," said Dirk Schumacher, an economist at Natixis.

Draghi, 74, dubbed "Super Mario" due to his long career as a financial problem solver, has seen Italian borrowing costs rise during his 17-month premiership, something he acknowledged at a news conference two months ago.

"This shows I'm not a shield against all events. I'm a human being, and so things happen," he told reporters.

The deeper issue is that Italy is big enough to bring down the rest of the euro zone periphery as its 2.5 trillion euro ($2.52 trillion) government debt pile is larger than those of the other four countries combined and too big for a bailout.

Ten years ago, the then ECB president restored market calm by saying the ECB would do "whatever it takes" to save the euro - code for buying the bonds of troubled countries.

His words on July 26, 2012, reverberate to this day, keeping markets relatively calm on the expectation the ECB will once again put a lid on borrowing costs, including via a new bond-buying scheme now in the works. read more

But this is only likely to be another stop-gap solution as investors are bound to test the ECB's resolve for as long as Italy does not convince them it can stand on its own two feet.

"The real problem is that Italy has been a growth underperformer for two decades," Moritz Kraemer, chief economist at LBBW, said. "And the fiscal situation is not the cause, it's the consequence of that weakness."

For the full article in pdf, please click here:

Ten years on, Italy faces debt crisis Draghi may not solve - article for Reuters 15.07.22
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Note: This article does not mention an important report from Professor David Blake of the City University Business School now called the Bayes Business School.

The report is dated 2018 and is entitled:

"Target2: The silent bailout system that keeps the Euro afloat"

For a summary of the report in pdf please click here:

Target2 - The silent bailout system that keeps the Euro afloat
Download PDF • 25KB

Italian Prime Minister Mario Draghi attends a news conference during a European Union leaders summit in Brussels, Belgium June 24, 2022. REUTERS/Johanna Geron/File Photo

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