Italian debt levels

Shares of Italy’s largest financial institutions have plummeted in the opening months of 2016 as piles of bad debt on their balance sheets become too high to ignore.  Amid all of the risksfacing EU members in 2016, the risk of contagion from Italy’s troubled banks poses the greatest threat to the world’s already burdened financial system.

At the core of the issue is the concerning level of Non-Performing Loans (NPL’s) on banks’ books, with estimates ranging from 17% to 21% of total lending.  This amounts to approximately €200 billion of NPL’s, or 12% of Italy’s GDP.  Moreover, in some cases, bad loans make up an alarming 30% of individual banks’ balance sheets.

But Krugman tells us the Italian debt levels are good! How good?

Italy is no Greece – it’s worse

Some have compared the risk of an escalating financial crisis in Italy to the seemingly perennial debt crisis in Greece that has ravaged European markets and tested European unity several times since 2008 as investors and EU members alike feared uncontrollable contagion. This has resulted in the multiple EU bail outs granted since then.
However, judging by the numbers it is clear that the financial risks posed by Italy are not comparable to Greece – they are far worse.
While Greece holds the top spot in the EU for the worst debt-to-GDP ratio, Italy comes in second place with a debt-to-GDP ratio greater than 132% according to Eurostat.
So what makes Italy so much worse?  While Greece has more than once brought the global financial markets to the brink, it is only the 44th largest economy in the world.  Italy represents the 8th largest economy in the world.

A deteriorating financial crisis in Italy could risk repercussions across the EU exponentially greater than those spurred by Greece.  The ripple effects of market turmoil and the potential for dangerous precedents being set by EU authorities in panicked response to that turmoil, could ignite yet more latent financial vulnerabilities in fragile EU members such as Spain and Portugal. 

So when the Kanosians like Delong and Krugman demand ore debt, this is what will happen,most likely.