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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
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Feb 11, 2022

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Page 1: Goldman Sachs Research

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

Page 2: Goldman Sachs Research

Goldman Sachs Global Economics, Commodities and Strategy Research 2

High Public Debt – An old friend

70

80

90

100

110

120

130

0

2

4

6

8

10

121

98

41

98

51

98

61

98

71

98

81

98

91

99

01

99

11

99

21

99

31

99

41

99

51

99

61

99

71

99

81

99

92

00

02

00

12

00

22

00

32

00

42

00

52

00

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

Page 3: Goldman Sachs Research

Goldman Sachs Global Economics, Commodities and Strategy Research 3

The Maastricht Effect

0

2

4

6

8

10

12

14

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

Page 4: Goldman Sachs Research

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

Page 5: Goldman Sachs Research

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)

Page 6: Goldman Sachs Research

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

20

11

20

07

20

11

20

07

20

11

20

07

20

11

20

07

20

11

20

07

20

11

20

07

20

11

20

07

20

11

20

07

20

11

20

07

20

11

20

07

20

11

EZ DEU FR IT ES PRT GRC AUT BEL NLD FIN DNK SWE UK

% of GDPPrivate Public External

Source GS Global ECS Research

Page 7: Goldman Sachs 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.

Page 8: Goldman Sachs Research

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

Page 9: Goldman Sachs Research

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

Page 10: Goldman Sachs Research

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)

Page 11: Goldman Sachs Research

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

Page 12: Goldman Sachs Research

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

Page 13: Goldman Sachs Research

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

Page 14: Goldman Sachs Research

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

Page 15: Goldman Sachs Research

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

Page 16: Goldman Sachs 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

Page 17: Goldman Sachs Research

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

Page 18: Goldman Sachs Research

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

Page 19: Goldman Sachs Research

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)

Page 20: Goldman Sachs Research

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)

Page 21: Goldman Sachs Research

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)

Page 22: Goldman Sachs Research

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)

Page 23: Goldman Sachs Research

Goldman Sachs Global Economics, Commodities and Strategy Research 23

Composition of Fiscal Policy

Spending Review

Tax Wedge

Indirect and Wealth Taxes

Privatizations

Page 24: Goldman Sachs Research

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%

Page 25: Goldman Sachs Research

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

Page 26: Goldman Sachs Research

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

Page 27: Goldman Sachs Research

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

Page 28: Goldman Sachs Research

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

Page 29: Goldman Sachs 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

Page 30: Goldman Sachs Research

Goldman Sachs Global Economics, Commodities and Strategy Research 30

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