Italian debt headed for 2012 flash point, predicts Schroders’ Wade

Italy will reach a “flash point” in the opening quarter of next year as the country’s debt mountain becomes increasingly unsustainable, according to Schroders’ chief economist.

Presenting his global economic outlook in an investor call yesterday, Keith Wade pointed out that Italy’s debt level is “quite high” at 121% of GDP and said the country has to roll over €275 billion of debt in 2012.

“Quite a chunk of that is happening in February and March next year. I think there will be a bit of a flash point in February and March… when people realise it’s going to be quite difficult for Italy to roll its debt over,” he warned.

Wade added that Italy is able to sustain its debt at interest rates of up to 7% over the short term but says this has to fall to about 4% to be sustainable in the long run. Yields on Italian ten-year government bonds are currently at 6.59%, according to Bloomberg.

The economist singled out Italy’s “quite low” growth rate as one of the main factors that will impede the country’s ability to service its €1.9 trillion (£1.6 trillion) debt and predicted the country will face recession in 2012.

Figures published by Italy’s National Institute for Statistics today show the country’s GDP decreased by 0.2% in the third quarter when compared with the second. This follows growth of 0.3% in the second quarter.

Wade is also “quite sceptical” about the eurozone’s prospects next year. He noted that a concrete solution to the debt crisis is yet to emerge and countries on the periphery such as Italy continue to face high yields on debt.

“Unless the ECB [European Central Bank] really steps up and increases its bond buying, then bond yields in peripheral countries just won’t come down because the investors I see just won’t take a punt on peripheral debt,” the economist said.

The current hope, Wade claimed, is that the central bank will attempt to help peripheral bond markets “through the back door”. He said that today’s auction of three-year paper by the ECB is intended to provide banks with funding to channel into eurozone sovereign debt, although he is doubtful that the loans will be used in this way on any significant scale.

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