Kai Ryssdal: Here’s the thing about the Italian debt crisis: It’s not like nobody saw this coming. Rome’s been running huge debts for years, and handling it well enough. But much like a habitual credit card borrower who’s suddenly had his interest rate jacked up, it’s the cost of that debt that’s causing headaches now.
Our senior business correspondent Bob Moon has that part of the story.
Bob Moon: The irony is, investors didn’t seem overly alarmed when Italy’s borrowing began to surpass its economic output a long time ago. So says economist Jacob Kirkegaard at Washington’s Petersen Institute for International Economics.
Jacob Kirkegaard: Unlike other countries in the euro area, or the United States for that matter, Italy has actually had very high debt levels for decades.
What’s behind that persistent borrowing? Kenneth Rogoff is an economist at Harvard University. He says Italians in the south have insisted on keeping up with their more well-to-do neighbors to the north.
Ken Rogoff: Italy’s a very divided country. The north is very productive and prosperous; the south far less so. And the north makes massive transfers to the south. There’s lots of government spending, lots of support programs, lots of versions of welfare. And it’s expensive.
That was fine as long as growing confidence in Europe’s financial union kept interest rates cheap. But now, that’s reversed into a vicious cycle. Investors are worried Italy could default, and they’re forcing interest rates higher. Again, the Petersen Institute’s Jacob Kirkegaard.
Kirkegaard: Italy was perfectly capable of financing its debt at, say, 4 or 5 percent interest rate. But now that we’re close to 7 percent, it begins to become much more of a problem.
That would amount to a doubling of Italy’s interest burden, and both Kirkegaard and Rogoff say that’s unsustainable — it simply won’t be able to pay. They remain confident, though, that a change of leadership could yet restore investor faith, and bring Italy’s interest rates back to more manageable levels.
I’m Bob Moon for Marketplace.
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.