By Walter Kurtz, Sober Look
How much money will Italy need to raise this year to keep its government running? It’s a critical question that goes to the heart of the eurozone crisis. But the media has been quoting two very different numbers: €220 and €450 billion.
WSJ: The rise in Italy’s borrowing costs at Wednesday’s auction to a euro-era high for Italy will do little to allay fears over the country’s ability to continue raising funds at sustainable levels, with Barclays Capital estimating Italy will need to sell around €220 billion ($285 billion) of bonds in 2012.
Reuters: Ten-year Italian yields are above the 7 percent level seen as unsustainable, with the country needing to raise 450 billion euros in debt markets in 2012. Government issuance of new euro zone debt will be scrutinised for any sign investors are shunning the currency bloc.
This couldn’t just be a difference in estimates with one number being double the other. Something else is going on. Getting this directly from the “horse’s mouth”, this is what Barclays Capital is actually saying:
Barclays Capital: Leaving short-term debt rollovers aside, the Italian government’s gross funding requirements for 2012 are just above EUR 250 billion; over the three-year period 2012-14, they amount to roughly EUR 650 billion, with about 125 billion reflecting government cash deficits.
So the number is actually €250 billion but it excludes rolling of short-term bills, which is another €144bn. The reason bills are typically excluded has to do with the fact that they are rolled more than once during the year. Bills are also much easier for the market to absorb than longer term debt. This estimate is fairly consistent with the forecast by Credit Suisse (below) although differences remain.
|Source: Credit Suisse|
Some of the longer term forecasts of Italy’s borrowing needs depend on Italy’s fiscal policy going forward. And these are notoriously difficult to forecast. The chart below shows the potential paths Italy’s debt to GDP ratio could potentially take.