Italy’s financial Woes Drive Interest Rates in US Housing Market Down – How Long Will It Last?

Italy is the Eurozone’s third largest nation, but it has been suffering from an economic and political crisis for several years, which is a concern both for the European Union and the United States. In the US, economic problems in Italy can lead to declines in the stock market and can affect the housing industry and interest rates negatively, so it is important to keep an eye on what is going on in Italy’s economy.

In a nutshell, the biggest problem in the Italian economy for both that country and the US is that it is simply weak with anemic growth. It has had double digit unemployment since 2012 and has the largest debt in the EU at 2.3 trillion euros. That is more than 130% of the entire economic output of the country per year. This is the #3 highest level of debt in the world after Japan and Greece. The gross domestic product for Italy is at a lower level than 2005. Recently, Italy’s 10-year bond yield, which show the borrowing costs for the country, went above 3%. This is compared to 18% a few weeks earlier. This means there is a higher risk that Italian debt will not be paid, which spooks investors.

At the end of May 2018, stock markets reacted negatively to the financial and economic situation in Italy as they started to demand higher yields to take on government debt in Italy. The main stock index for Italy dropped 3% and the banks in the country were hit hard with some stocks losing 5% or more.

A major risk for the EU and the US markets is that Italian politicians will stop following the rules of the euro or could even try to abandon the currency outright. The euro dropped 1% against the dollar at the end of May, which reflected concerns of investors. It is worth remembering again that Italy has the #3 economy in the Eurozone and it has 15% of the GDP of the zone. This is much larger than Greece, which was the source of the previous economic crisis in the Eurozone.

In addition to economic and financial woes, political chaos and failure to get a stable government has caused more problems in the country. Even though there were weeks of discussions and negotiations in 2018, an agreement between a populist group of euro-skeptics and the pro-EU lawmakers that run the government did not materialize. This has left the country in a serious economic crisis and slump that can eventually drag the rest of the EU down with it.

Italy has not had a true functioning government since the March 2018 polls led to a hung assembly. The Fiver Star Movement, a populist organization, came out as the biggest party. They tried to join the far-right Lega Nord group to develop a coalition government. But this did not work out when the two groups agreed upon Giuseppe Conte to be their prime minister candidate.

While the Italian economic and finance crisis is worse than Greece in 2015, it is not the end of the world at this point. The EU went through a crisis in 2012 when several smaller EU nations were thought to be about to default on their debt and there were fears that the euro would collapse. Fortunately, the leader of the European Central Bank came up with a bond buying emergency program that eliminated the risk of a debt spiral and this increased investors’ confidence in the EU economy. It is a good thing that this did not happen because it would have had dire consequences in the US housing and mortgage markets.

The bottom line for the US housing and mortgage markets is like that for any other major develop nation’s economy: A major economic crisis in Italy could cause damage to the housing and mortgage interest rates in the US as investors begin to panic. It is hoped that this situation will not occur; hopefully, the country will soon form a proper coalition government and the furthering of the economic crisis in Italy will be averted.

 

 

References: http://money.cnn.com/2018/05/29/investing/italy-euro-crisis-stocks-bonds/index.html

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