Country risk: Why Italy is a safer bet than Spain


Jeremy Weltman
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Delve into the details of their respective economic and political prospects, and Italy’s investor credentials are seemingly more favourable than Spain’s.

Italy rose seven places in Euromoney’s global rankings last year to 42nd out of 186 countries surveyed, as Spain slipped three places to 48th.

Both countries followed a similar path after 2008, exhibiting double-digit risk score declines, while more recently rebounding with the eurozone crisis easing.

Last year, Italy gained 3.3 points to move back on par with Mexico’s risk ranking, a BBB+ rated sovereign. Yet Spain lost half a point and is now trailing:

Devil is in the detail

Comparing their respective debt burdens and economic performances, the discrepancy would seem illogical.

Italy has a larger general government deficit than Spain, its economy is growing at a snail’s pace, unlike Spain’s, and the cost of insuring against default is somewhat higher based on five-year CDS spreads – presently 145 basis points compared with 115bp for Spain.

Further progress in reducing Italy’s deficit will be mitigated by additional expenditure outlays and property tax changes, and while economic growth will accelerate, it is likely to remain well below the pace in Spain.

There are question marks, too, over Italy’s financial stability after the failure of four regional banks last year.

Italy’s economic risk factor scores are mostly worse than Spain’s as a result, and Standard & Poor’s differentiates the two, giving Spain a BBB+ credit rating, but Italy only BBB-. Moody’s rates both sovereigns Baa2, and Fitch awards each BBB+.

Yet Italy’s fiscal metrics are in one sense more favourable than Spain’s.

Thanks to targeting a primary surplus, Italy’s general government deficit narrowed to an estimated 2.6% of GDP in 2015 from 3% in 2014, according to the European Commission. Spain’s deficit is put at 4.8%.

Italy’s structural fiscal deficit is only 1% of GDP, compared with 2.5% in Spain, implying the latter still has considerably more to do in implementing reforms.

Italy’s unemployment rate of 11%, high as it is, is still only half the level in Spain.

“The new fact in Italy is the employment improvement,” claims Riccardo Fiorito, ECR expert and professor of economics at Siena University.

“[Italian] firms are much more confident than before, and if employment rises, household spending should also, perhaps with a lag,” he says.

Country risk has been greatly reduced, too, by the progress of prime minister Matteo Renzi’s political reform bill enhancing the stability of governance Italy has lacked during the post-war era.

The political reforms will improve governance by giving rise to majority governments and weakening the ‘perfect bicameralism’ powers of the Senate, which will speed up policymaking.

In addition, Renzi has focused relentlessly on economic and administrative modernization, “pursuing essentially a centrist Italy-first agenda from financial reform to commercial relations with China and Russia”, says survey contributor M Nicolas Firzli,director-general of the World Pensions Council (WPC) and advisory board member for the World Bank Global Infrastructure Facility.

“These no-nonsense policies are starting to pay off as domestic and foreign direct investment pick up pace,” he adds.

Backtracking in Spain

On the other hand, Spain remains mired in a political crisis after an inconclusive election result which has left the country without a working administration for almost two months.

It remains possible a reformist government will be agreed, but it will not be in a strong parliamentary position to legislate.

“The prospect of a shaky coalition government led by the Socialists with the backing of a small centre-right party won’t do much to assuage investors’ fears with regards to the sustainability of Spain’s fragile recovery,” the WPC’s Firzli explains.

With background risks still surfacing over Catalonian secession, the Spanish recovery will be affected. It might delay reforms and a reduction in public debt, which, despite being lower than Italy’s, has now reached 100% of GDP on a gross basis.

Italian debt on the other hand has stabilized and is projected to fall this year from 132% of GDP for the first time since the 2008 global financial crisis, aided by privatization.

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