December 7, 2021

Should we be worried that this latest Italian bond crisis is going to have a major economic impact here in the US?

In my opinion, no.

For the umpteenth time, the news media is hyping an economic crisis in Europe. This time, it’s Italy, which just formed a new government of outsider political parties with a non-traditional economic platform. Financial markets are clearly showing concern that this inexperienced government might cause trouble.

This situation could very likely worsen the economic prospects for Italians, but Americans are not particularly exposed to Italian debt, and Italy is only our 11th largest trading partner. Despite the hype in the news, Italy looks like much more a European problem than an American one.

It’s true that Italy could inflict a lot of economic damage on the world. It has the Eurozone’s third largest economy and also its biggest debt load. The new Italian leadership has spoken about dramatically expanding social spending, but Italy already has high debt (130% of GDP) and stagnant growth. The markets are worried about a future debt crisis, and a default that would make waves across the global economy.

In a particularly bad scenario, this maverick government might cause a European crisis by withdrawing Italy from the Euro and defaulting on its debt. Such a large default could poison balance sheets across the global financial system. Financial markets fear the kind of  bad-debt “contagion” that spread between banks at the start of the financial crisis of 2008, which is why they’re jittery about Italy. The markets are nervous because this bad scenario from Europe has some parallels to the recent crisis. That memory of recent trouble is one reason I think sober minds will prevail.

For me, the real story here is the cautionary tale of the Italian economy. They have spent decades accumulating debt while investing their borrowed funds poorly. In education, infrastructure, entrepreneurship, technology, and corruption, Italy is a laggard. No wonder Italy’s economic growth is anemic. They’ll probably muddle through, but that isn’t the future I want for my country.

So, there’s no need to worry, but there’s plenty of reason to pay attention. Financial markets overreact in the short term — that’s normal. And the news media sells alarmism, because it gets attention. But the markets are already recovering, and the news is moving on to new “crises.” For investors in America, I say that for individuals, businesses, and countries, creditworthiness is built over years of prudent borrowing and investing. Let’s be careful to stick with the growth-oriented policies that made us rich, and avoid the Italian path of stagnation

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