Will Italy Need A Bailout?

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 |  About: PowerShares DB Italian Treasury Bond Futures ETN (ITLY), Includes: EU, EUFX, EUO, EWI, FXE
by: George Liu

Ever since Spain was forced to ask for bailout funds from the troika to prop up its deteriorating banking industry, many investors and economists have started to wonder if Italy would be next in line. However, although Italy is a PIGS nation and is suffering from considerable economic difficulties, recent developments and its overall economic position signal no reason for the country to solicit significant financial aid from either the European Stability Mechanism (ESM) or the troika.

Mario Monti, the technocrat prime minister of Italy, has repeatedly asserted that his country's financial system and national economy didn't require bailout funds from the troika. The frequency of these assertions have increased dramatically in recent months; most recently, at a press conference on Tuesday, July 10, Monti stated that although Italy might potentially tap the European Stability Mechanism, he is confident Italy won't require a bailout.

Well, it increasingly seems as if Monti's belief in the resilience of Italy's economy is a valid point. Italy just announced Tuesday that it canceled a long-term bond auction scheduled for August 14 because more tax revenue than expected was coming in. This is in part due to the country's increasingly stringent crackdowns on tax evasion, which was once rampant in Italy and other European countries such as Greece.

Moreover, the increase in tax revenue is a somewhat reassuring sign that Italy isn't going down the path of Greece, which, after imposing austerity measures, faced the threat of significant decreases in tax revenue due to revolts and unrest among a large portion of the Greek population. The declining tax revenue due to social backlash in turn created a self-perpetuating cycle of misery that continues to plague Greece today.

There are positive, albeit subtle, signs of strength in the Italian economy. For example, on Tuesday, figures came out that showed growth in Italian industry. According to Italy's federal statistics office, industrial production in Italy rose in May by 0.8%, an unexpected increase considering that consensus estimates predicted an approximate decline of 0.2%. Moreover, the annualized rate of Italian industrial production declined 6.9%, which, although negative, is higher than the expectations for 8.6%. Of course, more figures need to come out in order for us to properly gauge the state of its economy, but positive figures in industrial production, a pivotal part of the Italian economy, definitely bode well for Italy.

Analyzed from a macro perspective, it also becomes clear that Italy's economy isn't dire enough for it to request a bailout. For one, Italy has the best budget surplus ratio of the G7 countries—it will have a projected primary budget surplus of 3.6% of GDP this year, and 4.9% next year. Moreover, IMF's long-term debt sustainability indicator puts Italy at 4.1, which is extremely low (and thus positive); in context, Germany was assigned a rating of 4.6, France 7.9, and the UK 13.3.

The combined public and private debt of Italy is 260% of GDP, which is in the same range as Germany's and is much lower than that of the rest of the PIGS nations. As noted by Fitch Ratings Managing Director Ed Parker, who believes that Italy won't need external support, "it [Italy] is now running a pretty small budget deficit, has a much lower current account deficit, and doesn't have these problems in the banking sector."

Italy is in much better financial and economic shape than Spain and, although that isn't saying much, seems to be going down the right path to economic recovery. Recent figures such as the industrial production indicators, as well as the decision by the Italian government to cancel a bond auction show that the Italian economy is far from collapse, and reinforce the notion that Italy will most likely not require a bailout from the troika or loans from the ESM.

Relevant tickers: (NYSEARCA:EWI), (NYSEARCA:EUO), (NYSEARCA:FXE), (NYSEARCA:EU), (NYSEARCA:ITLY), (NYSEARCA:EUFX)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.