Too Cash-Strapped for a Boom: How Italy's Permanent Crisis Saved It from the Downturn

By Beat Balzli, and Marc Hujer

In theory, Italy, with its huge public debt, should be one of the euro zone's problem children. In reality, the country has come through the current crisis relatively unscathed. Can the rest of Europe learn something from its southern neighbor?

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Maria Cannata can't think of a job that would be more exhausting than hers. She has been la signora del debito, Italy's "debt lady," for almost 10 years. During that time, she has done an outstanding job.

Cannata leans back, relaxed, in a black leather chair. On the walls of her office in the Finance Ministry in Rome hang family photos and promissory notes from the year 1850. Cannata manages the liabilities of the second largest debtor among the world's industrialized countries and ensures that Italy remains solvent.

An unpretentious woman, Cannata, 56, sports a practical hairstyle and no makeup. She says that she sleeps well at night -- she's known worse times.

Italy's public debt is over €1.76 trillion ($2.27 trillion), or 115.8 percent of its gross domestic product, making it Europe's leading debtor. By comparison, the average public debt of the euro-zone countries comes to 78.7 percent of GDP.

Along with Portugal, Ireland, Greece and Spain, Italy is one of the unfortunately named PIIGS countries -- the axis of mismanagement, if you will. It's an appalling performance for a state that belongs to the exclusive G-8 club of the world's seven leading industrialized nations and Russia. Rating agencies put Italy on par with such shaky countries as Ireland, Malta and Portugal. Does Italy pose a threat for all of Europe?

Trusting in Italy

Cannata is familiar with the rumors. The bottom line is numbers, though, not words -- and how much interest Italy will ultimately have to pay on its debts. Every percentage point reflects a degree of trust, and every 10th of a percent less is a personal triumph for her.

When Cannata had to restructure billions in debts again last April -- €9.5 billion to be exact -- for a long time it looked as if there weren't enough buyers for the new government bonds. Some experts advised her to float fewer bonds on the market, to avoid driving down prices. But Cannata stuck to her course and, in the end, got what she wanted. She often negotiates better conditions than Spain, which doesn't have nearly as much government debt.

Is this an extraordinary ability? Gambling against the trend? Or just a cheap trick? Why, in the midst of the financial crisis, should anyone believe in this country, whose government debt can be partly attributed to Roman nepotism and corruption?

Ongoing Crisis

Prime Minister Silvio Berlusconi, 73, is politically weaker than at any other time since his re-election two years ago. For weeks now, his government coalition has appeared paralyzed, bitterly wrangling over a wiretapping law that Berlusconi wants to push through before the summer break, and mired in one bribery and justice scandal after the other. Two ministers have had to retire since May, and now, of all people, Economy Ministry undersecretary Nicola Cosentino has also had to step down amid allegations of mafia contacts and founding a secret society.

When Berlusconi received the "Grande Milano" award last week in Milan for his life's work, he was praised as a "statesman with rare abilities who leads his country with a clear conscience into the future." In reality, however, Berlusconi's political days are numbered. The struggle over his succession is already underway.

Cannata doesn't talk about politics -- she's not allowed to. She says that Italy has been plagued by an ongoing crisis for the past 20 years -- that's how long the country has been teetering on the edge of bankruptcy. In 1994, its debt peaked at 121.8 percent of GDP. There was already a lot of talk of action back then -- even though there was no global financial crisis at the time -- but that didn't have much of an impact on the amount of debt amassed by the country. Italy continued along the same path.

Ironically, the country's state of permanent crisis has perhaps had the effect of staving off the worst during the current crisis. It doesn't have to weather a burst real estate bubble or a construction crisis. Italy didn't have to bail out any banks, either. The government already had its hands full with its own debts.

Avoiding Others' Mistakes

While in Spain and Ireland a debt-financed construction boom and dubious deals by investment bankers were generating high growth rates, Italy was busy tinkering with its high government debt. "A more highly regulated banking system offered fewer opportunities to copy the mistakes made by other EU countries," says Alexander Kockerbeck, an analyst at the US rating agency Moody's. Italy hasn't engaged in the excesses of the past few years.

Italy is suddenly seen as the country that has shown its mettle in the crisis by taking the toughest stance, as an expert in debt management.

No country in Europe has been forced to tighten its belt as brutally as Italy. Cannata's boss, Finance Minister Giulio Tremonti, has just enacted draconian cost-cutting measures for his country. He did so against the will of Berlusconi, who has been scoffing at the crisis for months -- even promising tax cuts and maintaining that Italy is the richest country in the EU.

The austerity measures aim to save nearly €25 billion by the year 2012, with the main burden being shouldered by municipalities and regions. Its budget deficit amounts to 5.3 percent of GDP, roughly twice as much as in the past, yet remains significantly lower than the European average. The Italians plan for it to drop low enough to meet the Maastricht criteria, which stipulate that a euro-zone member's budget deficit can not exceed 3 percent of GDP, by the year 2012.

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