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A short history of Italy's debt

Newly nominated Italy’s Prime Minister Mario Monti speaks to the press after being appointed by the President on November 13, 2011 at the Quirinale, the presidential palace, in Rome. Italian President Giorgio Napolitano on Sunday nominated ex-European commissioner Mario Monti to form a new government, a day after Silvio Berlusconi quit after dominating politics for nearly two decades.

Stacey Vanek-Smith: Banks all over the world are revealing their exposure to European debt.  As of June, American banks reportedly held $47 billion worth of Italian bonds, European banks held more than $800 billion. Investors are worried that Italy might go the way of Greece and ask bond holders to take a hair cut on the facevalue of that debt. Italian bonds have become a kind of financial hot potatoe in recent weeks. But Italy's financial troubles have been a long time in coming as Bob Moon reports.


Bob Moon: The reality is, Italy's government has been treading water for at least two decades. Since the early 1990s, its debt levels have risen above 100 percent of the country's entire economic output. Economists say Italy's been able to stay afloat by paddling furiously -- that is, keeping tax revenue coming in.

But it's been adrift lately. Harvard economist Kenneth Rogoff explains it this way: Italy badly needs to promote growth to make up for an aging population.

Kenneth Rogoff: Even during the boom years, before we had the crisis, they were not growing very fast. So they weren't building up their capacity to pay back the debt.

For the time being, bond investment advisor Axel Merk doesn't think Italy is in danger of drowning in a rising sea of debt.

Axel Merk: While in the long run, paying interest rates of 7 percent or so is not sustainable, in the short run it's not really a problem.

Other experts insist the situation is more urgent, and Merk concedes bond investors are circling. Professor Rogoff cautions that Italy dare not tempt that fate.

Rogoff: Treading water at that high a debt level is a dangerous game.

I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.
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