To Get Italy’s Foreign Debt Exposure Entirely Wrong

If we were to comment upon Italy’s debt exposure then it would be incumbent upon us, as the sort of responsible, no snark, people we are, to get it right about Italy’s debt exposure. Which is, of course, exactly what The Guardian manages not to do:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]How much damage can the illusion of “taking back control” do to a country so dependent on international markets to finance its huge public debt?[/perfectpullquote]

Italy is less dependent than most countries upon foreigners to finance the public debt.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] MILAN, Sept 14 (Reuters) – Italian government bonds held by foreign investors fell to 664.3 billion euros ($777 billion) in June, the lowest level since March 2017, central bank data showed on Friday. International investors have been reducing their exposure to Italy since an anti-establishment coalition took shape in May and went on to form a government in early June, pledging to ramp up public spending and unwinding past deficit-curbing reforms. Totalling 2.34 trillion euros in July, Italy’s debt runs at more than 1.3 times the national output, making the country vulnerable to rising borrowing costs. [/perfectpullquote]

By comparison:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Our recently updated database on sovereign bonds holdings shows that Italy maintains some peculiarities in its debt ownership structure. The substantial increase in the proportion of Italian bonds held by the Bank of Italy since 2015 (from 5.8% to 19.3% of total outstanding debt) is an operational consequence of the quantitative easing launched by the European Central Bank, and is common across euro-zone countries. Beside this monetary policy-driven change, however, the portion of remaining bonds held by residents (banks and other investors combined) relative to non-residents has kept increasing since the last observation. This is all the more interesting given that Italy already had the highest proportion of debt held by residents and the lowest proportion of foreign holders among the most important euro-zone countries (all European countries in our database, namely Finland, France, Germany, Greece, Spain, Portugal and the Netherlands – see Figure 1 for a comparison of the four largest euro-zone economies). [/perfectpullquote]

More than other places, Italian national debt is an intergenerational matter within the country. The higher levels – perhaps not this high for sure but still – are thus more sustainable than lower levels possibly elsewhere.

As to why this particular pattern the usual explanation is that housing is mostly inherited, not bought on a mortgage. Mostly doing a great deal of work there – more than in other places perhaps. Thus the savings method of choice for households is Treasuries, not property.

But to claim that Italy should be more worried about foreign debt holdings when it fact it’s less is pretty good, isn’t it?