Italy Faces Its Own Financial Woes

Over the past couple of days, stocks in Italy have fallen. Interest rates on Italian bonds have risen. And, generally, sentences that used to include the phrase "Greece, Portugal and maybe Spain" now include a founding member of the European Union.What are the problems with Italy — and what are the Italians doing about it? Robert Siegel speaks to Roben Farzad, senior writer for Bloomberg Business Week, about Italy's financial woes.

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SIEGEL: Here's another side of the new normal. You wake up in the morning to news that markets all over the world are concerned about the shaky finances of a country that you hadn't known you were supposed to worry about. Today, it's Italy.

Over the past couple of days, stocks in Italy have fallen, interest rates on Italian bonds have risen and, generally, sentences that used to include the phrase, Ireland, Greece, Portugal and maybe Spain, now include a founding member of the European Union.

What are the problems with Italy and what are the Italians doing about it? We're going to ask Roben Farzad, a senior writer for Bloomberg Business Week. Welcome back to the program.

Mr. ROBEN FARZAD (Bloomberg Business Week): Hi, Robert. How are you?

SIEGEL: And first, how would you sum up Italy's economic problems?

Mr. FARZAD: Profligacy. Look, I mean, the euro was great. The euro zone was great when it all worked out and had this single currency and you can partake in cheaper labor and people going across the borders easily and lower cost of capital for everyone.

But when times are bad, i.e. this great global recession of ours, suddenly you have a dynamic where the haves and the have-nots are exposed for what they are. And the smaller countries, the more peripheral countries, turns out that they really borrowed beyond their means.

SIEGEL: Italy, though, is not a small country. It's one of the larger economies in Europe.

Mr. FARZAD: Right. But it's also the perennial sick man of Europe. It's a slow growing economy. It's not monolithic. The south tends to be poor. The north is wealthier and more industrious and has the majority of the finance and the capital and whatnot. The problem is, when times are good and risk is perceived as being overrated, you have the international debt capital markets being very easy with loaning money to countries. And slow growing countries like Italy and Japan, if you look at their last 20 years, they tend to over-borrow in order to make ends meet. Believe it or not, Italy is the third most leveraged country in the planet.

SIEGEL: Somehow, that became inescapably clear to people who deal in bonds this week. Something happened this week, it seems, to make people say, get rid of Italy's bonds.

Mr. FARZAD: Well, this has been ongoing for a while. It's no secret that Europe is in trouble. The European Union is in trouble, certainly. The first pyrotechnics we got out of the Greece situation were in the spring of 2010 and that wasn't nipped off enough.

There's this constant game of chicken between the debt capital markets and these countries, kind of this, I dare you or where's this going to spread to next? It almost reminds us of the fall of 2008 and, you know, Bear Sterns had already failed and was acquired and Lehman Brothers was next. And everybody knew that Merrill Lynch was next.

And in the same respect, we have the dynamic of the PIGS in Europe, Portugal, Italy, Ireland, Greece and Spain. And so, Greece is clearly out there. Ireland is, you know, had its issues, a bailout and so did Portugal. And now, the next frontier is Spain. That would have been unthinkable. And the worst case scenario is this then jumps over to Italy, which is the third largest economy in the continent.

SIEGEL: Well, what are the Italians doing about this and what do their creditors hope they're doing about it?

Mr. FARZAD: Well, the government there is trying to push through an austerity plan of about $57 billion with a lot of urgency. The idea was to push this through by Sunday. But the bond market is seeming to ask that, let's do this sooner because we're pushing your yields up ever higher. The problem is, is that this is perceived as being only a stopgap. How long can these peripheral countries ultimately stay in the euro zone if their populations are being asked to take cuts year after year after year?

I mean, there's a certain element of inevitability that, you know, if this all persists, if we have another stopgap situation that the euro, as it was conceived only a few years ago, is not long for this world.

SIEGEL: Okay. Thank you, Roben.

Mr. FARZAD: Thank you.

SIEGEL: That's Roben Farzad, senior writer for Bloomberg Business Week, who spoke to us from New York.

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