This news should have made the front page but it was hardly mentioned at all: Italy’s public debt is just a notch away from the speculative category! Standard & Poors lowered it to BBB -, the lowest “investment” rating. One notch lower would literally make it a “non-investment”, a speculative product, or a toxic asset... akin to a junk bond. We’re talking about the eurozone’s most important public debt (2,168 billion euros), third in the world volume wise (behind the U.S. and Japan) and third in percentage of GDP (133%, behind Japan with 243% and Greece with 174%). The other countries rated BBB – by S&P are Azerbaïdjan, Bulgaria, India, Morocco and Uruguay.

According to S&P, this downgrading of Italian debt “reflects the recurrent weakness in the performance of GDP, both in real and nominal terms, which hinders Italy’s capacity of servicing its public debt”. Growth is not picking up and debt can only increase in the coming years and weigh even more on public accounts, an untenable situation on the longer term. Unemployment has reached a record high of 13.2% of the active population in October (44% of young workers) and the economy seems stalled. Matteo Renzi, the head of the Italian government, talks a lot, makes announcements, proposes reforms, but for now nothing has really changed and the European Commission is showing signs of impatience.

What is remarkable is that the markets have been totally indifferent to the news. The 10-year rate on Italian debt has been going down regularly in 2014 and is now below 2%. There was no panic following S&P’s downgrading. If one wants to illustrate the bond bubble in the world, Italy’s case is most revealing.

Disconnect between market prices and economic reality is reaching a peak. A buyer of 10-year Italian bonds will soon be holding a speculative asset... under these conditions a yearly 2% yield makes for quite a risk, almost an aberration. But investors feel that the European central bank will intervene to bail them out. This is moral degradation of the worst kind: “Let’s take inconsiderate risks because, anyhow, the ECB will step in to avoid bankruptcy”. Of course, Italian debt is “too big to fail”, just as France’s, Spain’s, large European banks’... consequently, they all benefit from excellent financing conditions. So, finally, all is well: la dolce vita!

We seem to be living some form of collective hallucination. The monetary authorities cannot do everything... one just has to see all they’re trying to do for Greece, which is still failing. But a crisis with the Italian debt would be much more important. Can the eurozone survive if the highest public debt within its member states is rated as a toxic asset? That is the question, and the answer isn’t an easy one.

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