Berlusconi Ouster Can't Avert Default

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 ( TheStreet) -- Ousting Silvio Berlusconi won't make Italy's fiscal mess any easier -- with or without him, its debt is impossible and Italy is headed for default.

Italy's problems are fundamentally different than some other troubled countries, such as Greece. Like others its social benefits are too generous but substantially curbing those won't bring its books into balance. It is simply too late.

Italy's budget deficit is about 3.6% of GDP -- less than half of the U.S. gap, but its total debt, amassed over many years, is 130%. That is an amount well above what economists consider manageable even for a country, like the U.S., that can print money, and it is even worse for one like Italy without its own currency.

Although the final act of the Berlusconi government was to craft austerity measures that will lower the deficit to less than a very low 2% of GDP, or about 25 billion euros, it must borrow in 2012 300 billion euros -- a massive 19% of GDP -- in private capital markets to repay maturing debt. Italy is simply not growing fast enough in a Europe crippled by crises in Ireland, Greece, Spain, and Portugal for private investors to take that bet.

If Italy's nominal GDP were growing at a modest 4% and the interest rates it paid on new debt were 5% or less, it might manage its way out. However, neither is likely. In recent days, investors have demanded record rates, well above 6%, to purchase existing Italian debt, and even at those rates private demand is thin.

The European Central Bank has had to purchase substantial amounts of Italian bonds and the rate on 10-year Italian debt still pierced 6.7%.

Next year, the eurozone is not likely to grow in real terms, and Italian nominal growth (real growth plus inflation) is unlikely to much exceed 3% and is more likely to be nearer to zero. With such low nominal growth, interest rates on Italian debt much below 5% would be needed to keep Rome afloat. Even at those rates, the ECB would have to take a lion's share of Italy's new debt issues.

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