Brexit, Catalonia, Donald Trump and now the Italians are at it. Much of the world is chaffing under centralized government control systems. National governments are unpopular, supra national political systems such as the European Union are practically a blight nowadays.
So, the populist revolution continues, and given almost any opportunity to do so, seems to expand. Last week Europe was rocked by the unlikely coalition of two disparate populist political parties in Italy, coming together to form an anti-EU populist government in the third largest economy in Europe.
One of the coalition Italian populist parties wants lower taxes, the other proposed a Universal Basic Income for the poor. There’s not a lot of crossover in those two positions; the parties came together in their disdain for Europe’s political elites, the European Union and the Euro currency.
One of the first things this unlikely populist alliance did was attempt to appoint an economic minister who openly promotes pulling Italy out of the EU and off the Euro currency. Italy’s mainstream, unelected caretaker prime minister used parliamentary tricks to stall the populist coalition’s consolidation of power. To do so, a snap election had to be initiated, and if the current populist wave continues to gain momentum, the can may be kicked only slightly down the road on this trend. Perhaps only to July.
So beyond basic curiosity, why do American investors care?
Well, Italy is a major economic force in Europe, but more importantly Italy has a lot of debt. According to nationaldebtclocks.org, Italian government debt stands around $2.4 trillion, which is about 132 percent of Italy’s gross domestic product, or GDP.
Any national debt level approaching 100 percent of GDP is widely considered concerning by economists. When a nation is growing slowly, like Italy, and not in control of its own currency, like Italy, these ratios become even more problematic.
If Italy were to leave the European Union, and stop using the Euro currency, I believe management of its national debt would become practically impossible and there would be defaults. In this scenario, non-Italian financial institutions that own Italian government bonds, such as large global banks, mutual funds, insurance companies and pension funds would likely lose money.
And with $2.4 trillion in outstanding debt, there are a lot of institutions holding Italian bonds.
The loss of the Italian economy would be a major blow to the European Union in general and would imperil the continued existence of the currency union. In a nutshell, this is the type of black swan event that keeps professional investors staring at the ceiling at night.
Now, according to the analysts, the worst-case scenario here is unlikely to occur, but this is the perfect follow-up issue to the column I wrote three weeks ago about global debt. With government debt around the world at historically high levels, risks across the financial spectrum are at a nearly permanent higher state of agitation.
While headlines regarding royal weddings or the antics of Trump, Mueller and Kim Jong Un may get all the attention of our mouse clicks, it's economic and financial issues like Italy that are likely to have a greater impact on our prosperity going forward.
To be an investor in today’s late cycle markets will require vigilance to the changing risks evolving around the global economy. We may dodge a bullet with Italy, but there will be a next bullet.
Let’s make sure we are paying attention.