IMF Policy Discussion Paper:Should Italy Sell Its Nonfinancial Assets to Reduce Debt?

Should Italy Sell Its Nonfinancial Assets to Reduce the Debt?

Stefania Fabrizio

Box 1. Italy Has Never Been a Low-Debt Country

For most of the time between the unification of the country and World War II, public debt was above 60
percent of GDP. In three periods it went above 100 percent of GDP: at the end of the nineteenth century,
after World War I, and during World War II (Francese and Pace, 2008). A period of relatively low debt
in GDP terms was the mid-1960s (in 1964, debt was below 30 percent of GDP with a balanced budget).
Debt, however, started to rise again with the rapid expansion of primary expenditure (which jumped
from 29 percent of GDP in 1964 to 43 percent in 1985), accompanied by an increase in interest
spending. In the mid-1980s, the authorities embarked on fiscal consolidation as they recognized the
unsustainability of the fiscal position (Franco and Rizza, 2008). But despite the adjustment, public debt
rose to almost 100 percent of GDP in 1991. The debt grew until 1994, when it exceeded 120 percent of
GDP, partly because of large valuation effects following Italy’s exit from the European Exchange Rate
Mechanism. Afterward, in the run-up to euro adoption, Italian debt declined, helped by emergency
measures, privatization, and declining interest rates. After Italy joined the EMU, the debt ratio continued
to decline, helped by lower interest spending, but it started to grow again in 2005, as the primary balance
deteriorated and economic growth continued to languish.

One option being publicly debated is selling part of the state’s assets to reduce public debt.Broadly, this would be done through the creation of a
holding company (initially the state would be the only shareholder), with capital
equivalent to the value of the public assets for sale; this company would sell public assets and be listed on the stock market. The debt would be reduced using the proceeds of the sale of assets or through the sale of the equities of the company (see, among others, Guarino (2005 and 2007);
Franco (2007); and de Cecco (2007) for details on the proposal and comments). The sums involved, are, at least theoretically, larger than the debt: in 2003, the stock of total public assets was estimated to be about 130 percent of GDP.

http://www.imf.org/external/pubs/ft/pdp/2008/pdp01.pdf

Deutsche Bank´s Ackermann said yesterday that he is confident about Italy’s funding capacity.

“The household, private debt to GDP in Italy is only about 36 percent, so actually it’s a wealthy country. Net assets to GDP is over 200 percent,” he said. “So under the new government, I’m pretty confident, if they initiate the right measures, Italy will be able to raise funds again.”

 

That is such a positive way to describe what is in essence a sovereign foreclosure.

 

That is such a psoitive way to show that Italy IS solvent!

 

I think this quote was the indicator that should warrant alarm.

"In three periods it went above 100 percent of GDP: at the end of the nineteenth century,
after World War I, and during World War II (Francese and Pace, 2008)"

The only other times debt was this bad were as a result of world war. So the current government have run things so badly that it is like after a war. However there is no war. So that is pretty bad management. This is not something that the global investment market will reward.