Market Risks: Now, Everyone Start Freaking Out About Italian Debt

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(By Rebecca Lipman)

If you’re tired of worrying about Greece, take a break and worry about Italy instead.

The EU summit on Wednesday put markets in a rally on hopes the new package will head off the European sovereign debt crisis. And maybe the summit did send things in the right directions, but the problem is far from solved.

The package mainly deals with the debt of Greece. Certainly the country’s debt presents one of the larger issues at hand, but there is no guarantee the proposed 50% reduction of Greece’s government debt will be doable, or even sufficient to make the total $320 billion debt (of which only 200 billion of which falls under the scope of the package) manageable. (via New York Times)

And most importantly, the package does not lay strong groundwork for tackling the issues of Spain, Portugal, and the next big biggest debt issue of them all: Italy.

Italian Debt vs. Greek Debt

Italy, the fourth-largest economy in the EU and the world’s fourth-largest borrower after the United States, Japan and Germany, has a debt burden that top s $2.6 trillion. Naturally, investors are scared of such a large number and not feeling overly enthusiastic about buying up the debt.

James Stewart of The New York Times writes: “Greece’s debt is modest by comparison, and the fierce effort waged by European banks to avoid a huge write-down on the value of their Greek loans was less about Greece then about setting a precedent that could extend to Italy and other heavily indebted countries. Outside of Italy, French banks have the biggest exposure to Italian sovereign debt — over $500 billion, according to Goldman Sachs. And who knows what institutions (including American ones) insured all that debt?”

Debt Contagion and Reform

Goldman Sachs noted in a recent report, the high exposure of European banks to Italy “suggests the potential for financial contagion could be large.”

Business Insider reports “the cost of borrowing is soaring for Italy today. During a bond auction this [Friday] morning, 10-year government bonds sold at yields north of 6%. These were the highest yields for an auction since the country joined the euro.”

Tougher reforms are necessary for Italy in order to get its budget balanced and spur growth. In August, Italian prime minister Mr. Berlusconi (pictured above) promised ambitious reforms to get the European Central Bank to buy Italian debt. Among them were raising the retirement age, raising taxes on the wealthy and opening up the professions to more competition. By the time of Wednesday’s summit, he had done none of those things.

Of course, cracking down and initiating reform is hardly the country’s strong suit. Already tax evasion costs the Italian government an estimated €100 billion per year in revenues. It’s hard to tell what, if any, reform in Italy would bring in reliable and sustainable inflows.

Market Reactions

Despite the enthusiastic market rally over the euro zone’s new package it doesn’t seem the troubles in Europe will be winding down any time soon. The road to sovereign debt recovery is practically guaranteed to be a long and bumpy one.

Greece may be making headlines, but Italy promises to be the largest debt burden yet. So we were curious to find out which Italian stocks on the US market could suffer the same fates as their debt ridden homeland.

To find out, we list the 5 Italian companies trading on U.S. markets. How do you think they will fare?

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1. Eni SpA (E): Market cap of $93.10B. Engages in the exploration, production, transportation, transformation, and marketing of oil and natural gas.Share price as of 10/28 at $46.49. The stock has had a couple of great days, gaining 6.29% over the last week.

2. Gentium S.p.A (GENT): Market cap of $88.47M. Focuses on the development and manufacture of its primary product candidate, defibrotide, an investigational drug based on a mixture of single-stranded and double-stranded DNA extracted from pig intestines.Share price as of 10/28 at $5.91. This is a risky stock that is significantly more volatile than the overall market (beta = 3.07). It's been a rough couple of days for the stock, losing 6.49% over the last week.

3. Luxottica Group SpA (LUX): Market cap of $14.24B. Provides luxury and sport/performance eyewear worldwide.Share price as of 10/28 at $30.49. The stock has had a couple of great days, gaining 8.16% over the last week.

4. Natuzzi SpA (NTZ): Market cap of $152.48M. Engages in the design, manufacture, and marketing of leather and fabric-upholstered furniture.Share price as of 10/28 at $2.78. The stock has lost 15.76% over the last year.

5. Telecom Italia SpA (TI): Market cap of $25.49B. Provides fixed-line and mobile telecommunications, Internet, and media services.Share price as of 10/28 at $13.11. The stock has had a couple of great days, gaining 7.99% over the last week. 



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: E , GENT , LUX , NTZ , TI

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