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Goldman Sachs Global Economics, Commodities and Strategy Research 1
Italy: What’s Next?
Silvia Ardagna Global Macro & Markets Economist
silvia.ardagna@gs.com
44(20)7051-0584
Goldman Sachs International
September 2013
Investors should consider this research as only a single factor in making investment decisions. For Reg AC certification and other important disclosures, see the Disclosure
Appendix, or go to www.gs.com/research/hedge.html.
The Goldman Sachs Group, Inc.
Goldman Sachs Research
Goldman Sachs Global Economics, Commodities and Strategy Research 2
High Public Debt – An old friend
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80
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120
130
0
2
4
6
8
10
121
98
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51
98
61
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71
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81
98
91
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01
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11
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21
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41
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92
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52
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62
00
72
00
82
00
92
01
02
01
12
01
22
01
3
Government deficit and debt
Total deficit/GDP
Gov. debt/GDP
Source: Eurostat
Goldman Sachs Global Economics, Commodities and Strategy Research 3
The Maastricht Effect
0
2
4
6
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10
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16
40
45
50
55
60
65
70
75
Total revenue
Total expenditures
Interest expenditures
-10
-5
0
5
10
15
20
Primary balance
Interest expenditures
Net borrowing
Goldman Sachs Global Economics, Commodities and Strategy Research 4
Convergence and Divergence
AustraliaAustria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Japan
Netherlands
New Zealand
Norway
SpainSweden
Switzerland
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
0.5 0.6 0.7 0.8 0.9 1 1.1 1.2
Y/POP 2007
Y/POP 1980
Income per capita relative to the US
Source: Penn World Tables, GS Global ECS Research
Average GDP growth in Italy
1990-1999 = 1.4%
2000-2007 = 1.6%
2008-2010 = -1.6%
Quarterly GDP growth in 2011
Q1= 0.1%, Q2=0.28%, Q3=-0.15%
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
Ita
ly
De
nm
ark
Be
lgiu
m
Ca
na
da
Po
rtu
ga
l
Ne
the
rla
nd
s
Sp
ain
NZ
L
Sw
itze
rla
nd
Fra
nc
e
Ge
rma
ny
Au
str
alia
Au
str
ia
Ja
pa
n
UK
Sw
ed
en
US
A
Fin
lan
d
Ire
lan
d
%
Labour productivity Multifactor productivity
Productivity growth (2001-2008)
Source: OECD
Goldman Sachs Global Economics, Commodities and Strategy Research 5
Recession During Financial Crisis
-7.0
-5.0
-3.0
-1.0
1.0
3.0
5.0
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Q1
-20
00
Q1
-20
01
Q1
-20
02
Q1
-20
03
Q1
-20
04
Q1
-20
05
Q1
-20
06
Q1
-20
07
Q1
-20
08
Q1
-20
09
Q1
-20
10
Q1
-20
11
Q1
-20
12
Q1
-20
13
% QoQ (LHS) % YoY (RHS)
Goldman Sachs Global Economics, Commodities and Strategy Research 6
The “triplets” crisis
Sovereign debt crisis Banking crisis
Italy, Greece, Portugal Spain, Ireland
Institutional crisis
Euro area
0
200
400
600
800
1000
1200
20
07
20
11
20
07
20
11
20
07
20
11
20
07
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11
EZ DEU FR IT ES PRT GRC AUT BEL NLD FIN DNK SWE UK
% of GDPPrivate Public External
Source GS Global ECS Research
Goldman Sachs Global Economics, Commodities and Strategy Research 7
Key public finance figures
7
% of GDP 2010 2011 2012 2013 2014 2015
Net Borrowing Requirement -4.6 -3.9 -3.0 -2.9 -1.8 -1.5
Cyclically-adjusted NBR -3.6 -3.6 -1.2 0.0 0.4 0
Change in Cyclically-adjusted NBR -0.4 0.0 -2.3 -1.1 -0.4 0.4
Primary Balance 0.0 1.0 2.5 2.4 3.8 4.3
Public Debt 119.2 120.7 127 130.4 129 125.5
Public Debt (net support to Euro Zone) 118.9 119.9 124.3 126.9 125.2 121.8
Source: Ministero dell’Economia.
Goldman Sachs Global Economics, Commodities and Strategy Research 8
“Believe Me, It Will Be Enough”
Spain: 10-yr Bond Spread to Germany Spain: Fundamental Spread to Germany
Italy: 10-yr Bond Spread to Germany Italy: Fundamental Spread to Germany
Source: GS Global ECS Research
-1
0
1
2
3
4
5
6
96 98 00 02 04 06 08 10 12
%
+/- 2 std dev.
Actual
'Fair' Spread
10y Asset Sw ap Spread Betw een Spain and Germany
-1
0
1
2
3
4
5
96 98 00 02 04 06 08 10 12
%
+/- 2 std dev.
Actual
'Fa ir' Spread
10y Asset Sw ap Spread Betw een Italy and Germany
0
1
2
3
4
5
6
7
8
9
2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
%
+/- 2 std dev.
'Fair' Spread to Germany
Pre-Draghi Speech (24/07)
Bond Spread to Germany
0
1
2
3
4
5
6
7
8
9
2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
%+/- 2 std dev.
'Fa ir' Spread to Germany
Pre-Draghi Speech (24/07)
Bond Spread to Germany
Goldman Sachs Global Economics, Commodities and Strategy Research 9
Source: Consensus Economics, GS Global ECS Research
Shifts in the Consensus
Distribution of 2013-14 Growth Consensus Forecasts
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
0.0 0.5 1.0 1.5 2.0
d
e
n
s
i
t
y
growth rate
Jan-13
Jul-13
Jul-14
Germany
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
-1.0 -0.5 0.0 0.5 1.0
d
e
n
s
i
t
y
growth rate
Jan-13
Jul-13
Jul-14
France
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
-3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0
d
e
n
s
i
t
y
growth rate
Jan-13
Jul-13
Jul-14
Spain
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-2.5 -2.0 -1.5 -1.0 -0.5 0.0
d
e
n
s
i
t
y
growth rate
Jan-13
Jul-13
Jul-14
Italy
Goldman Sachs Global Economics, Commodities and Strategy Research 10
Output 10% Below Pre Recession Peak
100
102
104
106
108
110
112
Q1
-20
00
Q4
-20
00
Q3
-20
01
Q2
-20
02
Q1
-20
03
Q4
-20
03
Q3
-20
04
Q2
-20
05
Q1
-20
06
Q4
-20
06
Q3
-20
07
Q2
-20
08
Q1
-20
09
Q4
-20
09
Q3
-20
10
Q2
-20
11
Q1
-20
12
Q4
-20
12
Q3
-20
13
Real GDP (index)
Goldman Sachs Global Economics, Commodities and Strategy Research 11
Financial Conditions Still Tight
94
96
98
100
102
104
106
108
05 06 07 08 09 10 11 12 13
Germany
France
Italy
Spain
Tighteningconditions
Financial conditionsIndex avg. 2007=100
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
07 08 09 10 11 12 13
Germany
France
Italy
Spain
interest rates on business loans % up to € 1mil., of maturity 1-5 years
Source: ECB, National Central Banks, Goldman Sachs Global ECS Research
-15
-10
-5
0
5
10
15
20
07 08 09 10 11 12 13
Germany
France
Italy
Spain
Monthly flows (EUR bn, 6mths avg.)
0%
5%
10%
15%
20%
25%
30%
35%
40%
Germany France
Italy Spain
Finding customers Availibility of skilled staff
09 10 11 12
Access to finance
Cost of production
09 10 11 12 09 10 11 12 09 10 11 12
Goldman Sachs Global Economics, Commodities and Strategy Research 12
Is Public Debt Sustainable?
Source: GS Global ECS Research
90
100
110
120
130
140
150
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Official forecast
Debt Stable
Debt Increasing
Primary
balance
Growth-
Interest
Differential
Primary
balance
Growth-
Interest
Differential
Primary
balance
Growth-
Interest
Differential
2012 2.9 -5.6 2.9 -5.6 2.9 -5.6
2013 3.8 -3.4 2.9 -4.4 2.0 -4.4
2015 4.8 -1.9 2.9 -2.3 1.5 -2.3
Debt Stable Debt IncreasingOfficial forecast
Goldman Sachs Global Economics, Commodities and Strategy Research 13
Possible Non Mutual Exclusive Solutions
Grow Out of Your Debt
• Rebalancing composition of budget, structural reforms
• Room exists but is there the political will?
Following Japan
• Rebalancing composition of budget, structural reforms
• Room exists but is there the political will?
PSI within the EMU
• Distributional costs
• Political support
• Contagion
A More Feasible Outcome?
• ERF with improved incentive scheme and possible private sector
participation
• PSI and Eurobonds
Goldman Sachs Global Economics, Commodities and Strategy Research 14
Product market regulation
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
US
A
UK
Irela
nd
Can
ad
a
Neth
erl
an
ds
Sp
ain
Den
mark
Jap
an
No
rway
Sw
itzerl
an
d
Fin
lan
d
Au
str
ali
a
NZ
L
Sw
ed
en
Germ
an
y
Italy
Belg
ium
Po
rtu
gal
Au
str
ia
Fra
nce
Gre
ece
Index
1998 2008
Index of regulation of product markets
Source: OECD
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Sw
ed
en
UK
Irela
nd
Fin
lan
d
US
A
Den
mark
Neth
erl
an
ds
Sw
itzerl
an
d
Au
str
ali
a
Jap
an
No
rway
NZ
L
Sp
ain
Fra
nce
Belg
ium
Po
rtu
gal
Au
str
ia
Gre
ece
Germ
an
y
Can
ad
a
Italy
Index
2008
Regulation in professional services
Source: OECD
Goldman Sachs Global Economics, Commodities and Strategy Research 15
Regulation in other areas
0
10
20
30
40
50
60
Labor market regulation
Inefficiency of the justice system
Financial market regulation
Index
OECD
US
Italy
Source: OECD, Economic Freedom of the World. GS Global ECS Research
Goldman Sachs Global Economics, Commodities and Strategy Research 16
Labour market regulation
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Un
ited
Sta
tes
Can
ad
a
Un
ited
Kin
gd
om
New
Zeala
nd
Au
str
alia
Irela
nd
Jap
an
Sw
itzerl
an
d
Den
mark
Sw
ed
en
Neth
erl
an
ds
Fin
lan
d
Au
str
ia
Italy
Belg
ium
Germ
an
y
No
rway
Po
rtu
gal
Gre
ece
Fra
nce
Sp
ain
Index Labour market regulation
Source: OECD
0
10
20
30
40
50
60
70
80
90
100
Workers age 15-24 Workers age 15-24 Workers age 55-64 Workers age 55-64
Share of permanent
employment
Share of temporary
employment
Share of permanent
employment
Share of temporary
employment
%
Italy
European Union
OECD
Permanent vs. temporary employment
Source: OECD
Goldman Sachs Global Economics, Commodities and Strategy Research 17
Labour market outcomes
50.0
50.5
51.0
51.5
52.0
52.5
72.8
73.3
73.8
74.3
74.8
08 09 10 11
Participation rate
%
Male (lhs)
Female (rhs)
Source: OECD
6.0
6.5
7.0
7.5
8.0
8.5
9.0
-4
-3
-2
-1
0
1
2
Q1-2005
Q4-2005
Q3-2006
Q2-2007
Q1-2008
Q4-2008
Q3-2009
Q2-2010
Q1-2011
%%
Full time equivalent empl.
Total employment
Unemployment rate
Source: OECD
Goldman Sachs Global Economics, Commodities and Strategy Research 18
External Imbalances in the Euro area
90
100
110
120
130
140
150
00 01 02 03 04 05 06 07 08 09 10 11 12 13
unit labour costs, index2000Q1=100
Germany
France
Italy
Spain
Source: Eurostat, National Statistical offices, Goldman Sachs Global ECS Research
90
100
110
120
130
140
150
00 01 02 03 04 05 06 07 08 09 10 11 12 13
unit labour costs, index2000Q1=100
Germany
Ireland
Greece
Portugal
Peripheral economies are adjusting unit labour costs...
...contrasting with France and Italy
-20
-15
-10
-5
0
5
10
GER FRA ITA ESP GRC PRT IRE
% of GDP
2007
2012
Current account balance is improving in the periphery
Goldman Sachs Global Economics, Commodities and Strategy Research 19
Product markets reforms and gov. debt
during episodes of large fiscal adjustments
Source: Alesina and Ardagna (AEA meetings 2012)
Goldman Sachs Global Economics, Commodities and Strategy Research 20
Product markets reforms and growth during
episodes of large fiscal adjustments
Source: Alesina and Ardagna (AEA meetings 2012)
Goldman Sachs Global Economics, Commodities and Strategy Research 21
Labour markets reforms and gov. debt
during fiscal adjustments
Source: Alesina and Ardagna (AEA meetings 2012)
Goldman Sachs Global Economics, Commodities and Strategy Research 22
Labour market reforms and GDP
growth during fiscal adjustments
Source: Alesina and Ardagna (AEA meetings 2012)
Goldman Sachs Global Economics, Commodities and Strategy Research 23
Composition of Fiscal Policy
Spending Review
Tax Wedge
Indirect and Wealth Taxes
Privatizations
Goldman Sachs Global Economics, Commodities and Strategy Research 24
Owners of Italian Debt
Source: Bundesbank, GS Global ECS Research
Foreign Holdings of Government Bonds
20
25
30
35
40
45
50
55
2006 2007 2008 2009 2010 2011 2012
%
Italy
Spain
BI5% MFI
24%
FI21%
Residents others10%
ECB holdings6%
Nonresidents excluding ECB
34%
Goldman Sachs Global Economics, Commodities and Strategy Research 25
TARGET 2 Net Claims
vs. German 10-year German Bund Yield
TARGET 2 Imbalances Key
Source: Bundesbank, GS Global ECS Research
Foreign Holdings of Government Bonds
20
25
30
35
40
45
50
55
2006 2007 2008 2009 2010 2011 2012
%
Italy
Spain
40
45
50
55
60
65
70
2006 2007 2008 2009 2010 2011 2012
%
France
Germany
-800
-700
-600
-500
-400
-300
-200
-100
0
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13
%
German 10-yr benchmark yield (lhs)
Buba's net creditor position (rhs)
EUR bn
Goldman Sachs Global Economics, Commodities and Strategy Research 26 26
Lengthened maturity of public debt reduces
Source: Ministero Delll’Economia
0
1
2
3
4
5
6
7
8
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Se
pt 2
01
2
ye
ars
Average life Duration
Maturity of Government Debt
Goldman Sachs Global Economics, Commodities and Strategy Research 27
Opinion of Euro Area Citizens on EMU
and Euro
0
10
20
30
40
50
60
70
80
90
Belg
ium
Irela
nd
Gre
ece
Fin
land
Neth
erl
ands
Germ
an
y
Fra
nce
Sp
ain
Malta
Austr
ia
Italy
Cyp
rus
Po
rtug
al
EM
U a
vera
ge
% in favour Spring 2011 Autumn 2011Spring 2012 Autumn 2012
Source: Eurobarometer
Goldman Sachs Global Economics, Commodities and Strategy Research 28
ERF: The Path To Redemption
Italy
1,884 bn Germany
2,090 bn
Ne’ds
389 bn
Spain
706 bn France
1,689 bn
Belgium
225 bn
Austria
214 bn
ERF
2,225 bn
Germany
1,541 bn
Italy
954 bn
Austria
181 bn
Ne’ds
364 bn
France
1,193 bn
Belgium
224 bn
Spain
652 bn
Euro area Redemption Fund (ERF) Takes Over Debt in Excess of 60% GDP
Source: GS Global ECS Research
Goldman Sachs Global Economics, Commodities and Strategy Research 29
The Italian Case
0
500
1000
1500
2000
2500
13 18 23 28 33
EUR bn
European Debt Redemption Fund
Size of ERF
0
500
1000
1500
2000
2500
11 16 21 26 31
EURbn
Italy
Total Debt held by public
Total Debt held by ERF
Source: GS Global ECS ResearchSource: GS Global ECS Research
Primary
balance
Growth-
Interest
Differential
Primary
balance
Growth-
Interest
Differential
Primary
balance
Growth-
Interest
Differential
2012 2.9 -5.6 2.9 -5.6 2.9 -5.6
2013 3.8 -3.4 2.9 -4.4 2.0 -4.4
2015 4.8 -1.9 2.9 -2.3 1.5 -2.3
Debt Stable Debt IncreasingOfficial forecast
90
100
110
120
130
140
150
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Official forecast
Debt Stable
Debt Increasing
As % GDP
Goldman Sachs Global Economics, Commodities and Strategy Research 30
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