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Adding Italy To The Short Side


  • Italy's government debt to GDP is too high.
  • Italy's government expenditures equal 50% of GDP, an unhealthy reliance on government outlays.
  • The economy is leveraged to the banking sector which is falling apart.


As a strong believer in the theory of debt deflation and the tremendous negative consequences that arise from excessive debt, high debt sectors and countries tend to make the top of my short list.

I have written at length on the theory of debt deflation and why an economy based on debt has slower growth, low inflation and lower long-term interest rates, a dynamic that is bad for overall prosperity and enables greater wealth dispersion.

When looking at the major developed countries of the world, Italy (EWI) ranks near the top in terms of government indebtedness. Italy's debt currently sits at 132% of Gross Domestic Product, or total output for the country.

Government Debt to GDP:

Source: Trading Economics, EPB Macro Research

Italy clearly has a debt problem and the ideal solution would be to reduce spending and lower the county's indebtedness, allowing for more economic prosperity. The problem Italy finds itself in is the heavy reliance on government spending to fuel the economy. Italy ranks second among developed countries for government spending as a % of GDP.

Government Spending as a % of GDP:

Source: Trading Economics, EPB Macro Research

Italy has a debt problem and needs to reduce spending. The government spending is currently 50% of GDP and a reduction in expenditures would massive slow GDP growth in Italy. The country is very reliant on government spending and needs to reduce expenditures.

Italy has two choices. They can continue to increase government expenditures and increase their indebtedness, risking default or a banking crisis, or they can reduce government spending which would massively hurt GDP growth in the short run given the % of the economy tied to the government.

Either path has massive drawbacks and the rise of political instability in Italy is not a surprise

This article was written by

Eric Basmajian profile picture

Eric Basmajian is the Founder of EPB Macro Research, an economics-based research firm focusing on inflection points in economic growth and the impact on asset prices. He was previously an analyst at a quantitative hedge fund.

Eric leads the investing group EPB Macro Research where he applies investing strategies with the understanding that when there is an economic inflection point, company fundamentals don’t matter, technical trends break down and investors are blindsided. His analysis helps investors position their portfolios to avoid losses and maximize gains during changing economic conditions. Learn More.

Analyst’s Disclosure: I am/we are short EWI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (16)

Oh well... in north Italy - the industrialized part of Italy - the industrial output index is growning at 7%. Better than China... the trade surplus surplus 2017 was 47,5 billions of euros... so be carefully to short Italy. Reports of Italy death are greatly exaggerated...
Thanks for the interesting article, especially the graphs. It's a shame too, as it is a beautiful country with fabulous food, wines, and people. so much of Europe has gone the same way though, just a matter of degree.
I don't see the slow down. Italy's business confidence is at 111 and consumer confidence at 116.
Italian banks reduced their bad debt by 20% last year.
The next bar in GDP can be 0.4% that makes the authors extrapolation (red arrow) invalid. Also the green and red arrows are placed to min and max that is a questionable practice when talking about trends.
Are you living in Europe or Italy or do you have friends there. This information is nice. But I here it every year. Do you know how much money came from the ECB ??
I grew up in a neighbor country. Italy is divided, south is low income area and greatly controlled by the mafia and the north is driving the GDP. You will hear very different opinions depending on where the information is coming from.
Sure, the situation isn't great but I don't see a reason why I would short EWI now.
Italy, the most beautiful country in Europe, is in a hopeless situation. In fact the country is governed since the last world war by crime and corruption. The mafia got free hand from the American liberators for their help against the Nazi occupation and with this they got a kind of legalisation. Even Prime Ministers and Presidents were members of the Mafia. In fact the mafia is the biggest economic organisation and nearly every company has relations to them. The facts mentioned in this article are fully correct, much to high debt, much to high government expenses, most Italian banks are insolvent, most companies are not competitive ( missing investments, missing finances, missing skilled labour since many years), an enormous corrupt bureaucracy, there is nearly no income increase since one generation and incomes were already 25 years ago low, that the reason for the worst demographic situation in Europe ( No money for children), Immigration is no solution, how further to the south how more difficult the situation gets. In such a country.......Where are you able to find a job..... Who is willing to pay taxes......Who is able to invest...... the QE money, billions, of the ECB, what is the result......politics in Italy, what are the doing except the above mentioned problems....... So first crime and corruption has to be solved, not the other way around.
crrj profile picture
Everything is possible--never believe gloom and doom--- Just rally the troops of people

Corruption flourishes when govt gains too much power. It is always difficult to get back to integrity when leaders oppress the sheeples who elect them.

Italy should leave the socialist EU--unfortunately, since Italy ran to authoritarianism, lost the war, and since has lived in alter reality, one can hope they will get back to business. Watch Brazil--they kissed communism--almost ruined them--- let's see if their Trump can do for them what Trump has done for the US.

FYI--Germany is gonna now import BILLIONS if clean, safe, nat gas for decades----Japan and China are next---- go us pipeline companies :) KMI?
Yeah hasn't Dalio been short Italian banks??
crrj profile picture
Why not japan or france, if debt/gdp is the issue?
I had the same question in mind. I wrote it and erased half way.

Glad you asked. I'm curious myself to learn the merit of this looming " debt explosion doom ".

From purely common sensical assertion, it seems plausible that CB expansion is unsustainable in the " long run ". However, WHEN is that " long run " going to become truly long and explode?

When every single country in the world is resorting to debt as a means to grow the economy, who is going to blow the whistle and why?

If this scheme does implode when that " long run " is realized, it will be a Global chain effect and the entire global monetary system will (should) collapse.

Will that ever happen though ? I don't know.
In the very short term a short on EWI could very well be profitable.

But the risk-adjusted performance of such a trade will quite surely be horrible.
Eric Basmajian profile picture
Down 23% since this article. Still in the position.
I have definitely noticed that Europe is slowing in recent months. Not sure if I am confident or competent enough to short EWI, though.
" Italy has one of the worst demographic situations in Europe (and the world) "

What does that mean, exactly ?
Aging population. Low fecundity.
James Hanshaw profile picture
The young and skilled people have left
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