We have previously known that Italy has a mountain of debt, with a debt-to-GDP ratio of 120%. To put this figure in perspective, Australia’s debt-to-GDP ratio sits at around 22%. However, what has set Italy apart from the PIGS is the fact that Italy has not experienced a housing bubble and does not have high household debt. Italy’s banking system has not needed to be rescued either. 

Italy has been sitting quietly on the financial sideline, under the radar, hoping that no one would notice its outstanding bonds of US$2.2 trillion – which is the third largest in the world after the US and Japan.  

The triggers for the recent concern in Italy were puzzling. It began with the downgrading of several Italian banks based on their exposure to struggling euro zone economies. In the blink of an eye, financial markets had panicked and pushed up the cost of borrowing (Italian bond yields) sharply, by around 1% up to around the 6% mark. While this rise in Italian bonds yields was sharp, it is small in comparison to Greece’s bond yields, currently sitting in the high-teens. 

So what do the debt issues in Italy mean for Australia and the rest of the world? Apart from making good headlines and causing fear to enter into the market – the European debt issues have little impact on the vibrant and emerging markets of Asia and Latin America that are driving global growth. If a European country were to default, there is no doubt we would see ripples throughout the globe – in particular if the bigger economies of Spain or Italy were to fail. However the more immediate problem still lies with Greece at the moment.