The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- There's been increasing investor concern over the potential for Italy to follow in Greece's footsteps, an overwrought comparison in our view. Italy is the eurozone's third largest economy and carries its largest debt load -- which many speculate makes it "too big to bail out." And by existing means like the European Financial Stability Facility as presently structured, that may be true to an extent. But the question of whether it will need a bailout or not is an entirely separate matter.
Italy has a large amount of debt but not resulting from a recent spending problem. Rather, it's mostly old accumulated debt. Moreover, the majority of Italy's debt stock is held by domestic investors -- a more stable source of funding than foreign investors, who often repatriate funds during economic stress. Italy's debt matures gradually over years, so the immediacy likely isn't as acute as Greece. What Italy mostly needs to mitigate concern is economic growth. Now, it's true Italy's growth hasn't been robust lately, but even modest increases can significantly improve their debt profile. Could the situation worsen? Of course. But it appears to us unlikely in the immediate future, and there are credible means by which Italy can grow out of its issues.
The next six charts further depict why we believe it's unlikely a Greek tragedy plays in the Roman Colosseum any time soon.
Exhibit 1 shows unlike Greece, Italy's economy has been expanding for the last six quarters.
Exhibit 1: Italy and Greece Year-Over-Year GDP Growth
Source: Bloomberg; (08/2006 - 06/2011).
Exhibit 2 shows expectations are for Italy to continue expanding, unlike Greece.
Exhibit 2: Italy and Greece Growth Projections
Source: Bloomberg; (12/31/2001 - 12/31/2010, estimates as of 09/2011).
Exhibit 3 shows Italy's budget deficit is roughly half Greece's. In fact, Italy currently runs a primary budget surplus (tax revenue covers all spending excluding debt interest). And austerity measures currently under discussion could slash Italy's deficit further -- if not eliminate it by 2013.
Exhibit 3: Italian and Greek Budget Deficits as a Percent of GDP
Source: Bloomberg; (08/2006 - 06/2011).
In the bond market, there is no comparison. As shown in Exhibit 4, Greek yields on 10-year debt hover north of 20%. Italy's are in the 5% range.
Exhibit 4: Italian and Greek 10-Year Sovereign Bond Yields
Source: Thomson Reuters; (09/2009-09/2011).
Greece has substantially more debt (relative to GDP), and Italy has seen higher debt before without catastrophic consequences. Exhibit 5 displays Greek and Italian debt as a share of GDP since 1990.
Exhibit 5: Italian and Greek Government Debt as a Percent of GDP
Source: Bloomberg; (1990-2010).
Greece's interest payments as a share of government revenue has been increasing -- Italy's path is back on track. In fact, as shown in Exhibit 6, Italy's interest payments as a share of its tax revenue are lower today than during the entirety of the last economic expansion.
Exhibit 6: Italian and Greek Interest Payments as a Percent of Tax Revenue
Source: ECB; (2000-2010).
The issue of primacy in Europe is Greece. Yes, some other nations have issues, including Italy. But none are nearly so acute, so immediate and so problematic as Greece. And yes, the fear of Greece has driven bond yields higher for the periphery. But at the same time, the fear of being labeled "Greek" has motivated leaders in many other parts of Europe to take action. So it's quite a stretch to assume Italy's in the same boat as Greece.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.