Italian private debt is quite low and yesterday I mentioned that Italian homeowners don’t have much in the way of mortgages. David Henderson then asked a good question:
“Were more Italians to take out mortgages on their houses to buy government bonds, for example, Italy could eliminate its interest-payment problem.” How is that good news? The government would still have to pay interest on this debt.
The Italian government has high debt and productivity is not going up any time soon. We can expect a mixture of lower government spending and higher taxes, otherwise the country defaults, maybe the country defaults anyway. Ideally “they” would like to send equity in Italian homes to bondholders in lieu of making the interest payments. Italy doesn’t do a good job collecting taxes and the economy already has lots of distortions, so pulling wealth out of homes would in principle be a way to go. A CDO tranche instead of an interest coupon, so to speak. One can imagine the Italians borrowing more against their homes and sending the money to their government as a tax, or accepting lower transfer payments from the government, and that would implicitly serve as a way of paying off the bonds with fractions of homes. Of course that probably won’t happen.
Italy is house rich, somewhat cash poor, and has a miserable recent history of growth. If you look at the wealth side of the balance sheet, you can easily work up a heady optimism for Italy. If you study public choice theory, it is harder to do so. How many people in that country are either paid to do the wrong thing, or paid to do not so much at all? TGS reigns.
Italy’s privileges and distortions are so often so local, and so concentrated in inefficient professional services, that it is hard to imagine clearing them up quickly in the form of a big bang, in the way that say New Zealand or Chile or Thatcher’s England did. And even those successes took some time to pay off and underperformed for years.
Note that if Italy could credibly be expected to grow a mere 2 pct. a year — maybe less — the entire eurozone crisis probably would be messy but manageable. It’s not.
File under: non siamo cosi’ ricchi come pensavamo di esserlo!