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Euromoney Country Risk

Italy less risky than Spain in latest economist survey despite political uncertainty

Notwithstanding the recent rise in its government bond yields, Italy still ranks higher than Spain in Euromoney’s Country Risk Survey, despite the country’s uncertain political outlook.

Battered and bruised by the eurozone debt crisis, Italy and Spain’s fortunes have plummeted in concert since 2008, with their scores in the ECR survey falling sharply.

The latest results indicate that economists consider Spain to be the weaker of the two economies, a legacy of its housing bust and its eye-watering unemployment rate. However, analysts think Italy is less stable politically despite having a superior overall ranking than Spain, as the chart below illustrates:

Italy receives higher scores in the survey indicators for bank stability, employment and government non-payment/non-repatriation than Spain.

Spain outscores Italy in the survey indicators for government stability, corruption and institutional risk, highlighting the political uncertainty created by former prime minister Silvio Berlusconi’s threatened expulsion from the Senate and the uncertainty surrounding his party’s withdrawal from the coalition.

Both countries have seen their borrowing costs fall since the peak of the crisis, but a small premium attached to Italy after an uptick at both the short and the long end highlights its political problems, which could spark the snap elections anticipated since its formation.

Corruption is also a larger problem in Italy, in spite of a recent Spanish party financing scandal, involving allegations of illicit activities involving former PP treasurer Luis Bárcenas and prime minister Mariano Rajoy, weighing down experts’ evaluations.

Constantin Gurdgiev, economics professor at Trinity College Dublin, and an ECR expert, says: “Key differentials between Italy and Spain are found in the divergent dynamics of primary and general government deficits and the levels of public debt, as well as in the underlying trends in these economies’ capacity to fund these imbalances.

“Italy has been suffering from a long-term debt overhang, compounded by the significant exposure to domestic bond markets and shrinking share of foreign investors willing to hold country debt.

“Spain is operating at a severely diminished productive capacity relative to its potential. The Spanish economy is experiencing banking and growth crises that contrast to the pre-crisis period of robust growth.”

In analysts’ forecasts through to 2018, Spain is expected to run more than three-times greater gross deficits compared with Italy. Spain’s primary deficits are also extreme, well in excess of 3% of GDP in 2012 and 2013, and are expected to remain around 2% to 2.5% of GDP through to 2017.

Italy, ranked 53rd after a two-place improvement since June, has a superior country risk score to Spain (57th), despite being charged a higher rate of interest by the capital markets.

Italy’s 10-year borrowing costs are now 4.5%, with Spain a touch lower on 4.3% compared with 5.3% at the end of last year when Italy appeared to be the safer bet. 

Both countries have seen their borrowing costs fall since the peak of the crisis, but a small premium is attached to Italy’s cost of debt after an uptick at both the short and the long end in recent weeks.

The Euro Zone Barometer monthly survey of independent forecasters predicts virtually identical downturns for Italy and Spain in 2013 followed by modest recoveries next year. However, Spain’s unemployment rate of some 27% is more than double Italy’s, its budget deficit is triple and its debt (though lower) is still considerable.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.

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