Nợ công của Italya và bài học cho Việt Nam

FOREIGN TRADE UNIVERSITY

MACROECONOMICS ESSAY
ITALY’S PUBLIC DEBT AND LESSONS FOR VIETNAM

Group members:

Tran Minh Thuy - 1113150044
Do Thi Hai Ha

- 1113150045

Dang Huyen My - 1114150042
Dang Huyen Anh - 1114150040
To Huyen Linh

- 1114150041

Pham Thu Hang

- 1114150039

Ha Noi, May 30th, 2013


CONTENT

I. Introduction.......................................................................................... 2
II. Italy’s public debt crisis....................................................................... 3
1. Public debt and its composition.......................................................3
2. The public debt crisis in Italy...........................................................3

2.1. Overview....................................................................................... 4
2.2. The causes.................................................................................... 5
a. Poor Performance of Economic Growth.......................................5
b. Long Term Tax Collection Problems.............................................6
c. Competitiveness............................................................................7
2.3. Impacts on Italy’s economy..........................................................7
2.4. Policy reactions............................................................................9
a. Political change............................................................................9
b. Economical change.....................................................................10
c. Social change.............................................................................. 12
III.Public debt in Vietnam and lessons from Italy................................13
1. Overview of public debt in Vietnam..............................................13
1.1. Government revenues and expenses..........................................13
1.2. Budget deficit and public debt....................................................14
1.3. Risks related to Vietnam public debt..........................................15
2. The inferred lesson from the public debt crisis of Italy...............15
2.1. Management policies..................................................................16


2.2. Increasing government revenues and decreasing government
spending.............................................................................................. 17
2.3. Improvement in economic efficiency.........................................18
2.4. Expansion of the domestic financial market.............................19
IV. Conclusion.......................................................................................... 21
V. References........................................................................................... 22


I. Introduction
In the framework of the European debt crisis 2011-2012, Italy seems
to have become the democratic world’s most threatened European ally.

Italy’s debt crisis is on a different level than the previous European
crises, given that Italy is four times the size of Greece, Portugal and Ireland
combined with a gross GDP of $2.1 trillion, making it the 8th largest
economy in the world and the third largest in the Euro-zone after Germany
and France.
Italy is characterized by the second richest private wealth in Europe –
that is, 130,200 Euro savings per capita, just behind France and private
debt is well below $10,000 per household.
The combination of private wealth and private liabilities puts Italy far
ahead of the U.S. and most other Western countries in terms of per capita
net savings.
However, it has been considered to be the most vulnerable of the
national economies threatened by the European debt crisis because of its
huge public debt, which reached 119% of GDP in 2011 though the country
is regarded as "too big to fail".
There have been many over-alarmist voices about the economic and
political situation of Italy on the international scene - both before and after
the change of government on November 12, 2011.
Moreover, interest rates paid for Italian public debt rose to record
highs in fall 2011 peaking at 7.3%, which is beyond the threshold risk zone
of 6-7% that forced Italy to slip under the rescue programme.
1


Through an in-depth review of Italy’s public debt crisis in the context
of European debt crisis in terms of the causes, consequences and solutions
of the government, this paper will bring you a close look on what was
going on during that period.
Along with that, we also aim at drawing an inferable lesson to
Vietnamese public debt.

II. Italy’s public debt crisis
1. Public debt and its composition
Public debt, which is also referred to as government debt or national
debt, is all of the money owed at any given time by any branch of the
government.
It includes debt owed by the federal government, the state
government, and even the municipal and local government.
Public debt or public borrowing is considered to be an important
source of income to the government.
When the revenues a government collects are not sufficient to cover
its expenditures, a government usually resorts to borrowing.
Such borrowings become necessary more in times of financial crises
and emergencies like war, droughts and other disasters …
Public debt can be categorized either as internal (domestic) debt or
external (foreign) debt.
Internal debt refers to any money or services owed to individuals,
businesses, or financial institutions within the country which is more often
created by state or municipal governments, since they generally do not
have the power to negotiate with other nations.
External debt, on the other hand, is money, services or goods owed by
the government to foreign lenders, either in the form of other governments,
international organizations such as the World Bank, or financial institutions
in other countries.


2. The public debt crisis in Italy
2.1.

Overview

Italy was hit hard by the economic crisis of 2007–2011. The national
economy shrunk by 6.76% during the whole period, totalizing sevenquarters of recession.
According to the EU's statistics body Eurostat, Italian public debt
stood at 116% of GDP in 2010, ranking as the second biggest debt ratio
after Greece (with 126.8%).
The IMF predicts public sector debt of 123.4 % of GDP in 2012. By
2013, Italian national debt is forecast to reach 123.8%.

Source: Debt and Growth in G7


The figure above shows that Italy has struggled to reduce national
debt as a % of GDP since government debt has risen to over 100% of GDP
in the late 1980s.

2.2.

The causes
a. Poor Performance of Economic Growth
There are many factors that cause Italy to experience a public

debt crisis.
The first and foremost reason is that since 1990, Italy has experienced
sluggish growth.
With only small increase in real GDP it has proved difficult to reduce
the debt to GDP ratio.
Starting in 2001, Italy's GDP growth turned absolutely paltry. It finally
plunged below zero during the global recession and has barely recovered

since.
Moreover, the Italian economy has performed badly compared to its
Eurozone counterparts.


From 1990 to 2004, the average annual GDP growth of Italy was
approximately 1.5% (National Statistics) which was a half of that of Spain.
It is unsurprising that growth forecasts have been slashed and
Source: National Statistics

Italy is stuck in an unfortunate

deflationary debt spiral.

b. Long Term Tax Collection Problems
Another cause of the crisis is due to a poor track record on tax
collection and wasteful government spending. Corruption and weak rule of
law are poisonous for business. Beyond that, they also allow the country's
robust underground economy to flourish. In particular, the size of the black
economy means that substantial parts of economic activity remain untaxed.
Since 2000, most measures of good government have been on a
downward slope. Gros breaks out the following chart:


Economists estimate that around 540 billion euros (£434 billion) is
lost through Italy’s black economy through tax evasion by individuals and
companies – the figure is around 35 per cent of the country’s GDP and last
year more than 12 billion euros were recovered (Tejvan Pettinger).

c. Competitiveness

The other issue is the long-term decline in Italian competitiveness.
Italy has lagged behind the EU average for competitiveness. Italy’s
position deteriorated steadily during the first ten years of euro area
membership, after a decade of already sluggish growth and market
slowdown in the dynamics of exports.
Stagnation in productivity since the end of the 1990s and the
correlated rise in unit labor costs reduced its market shares for goods and
services measured in volume terms by almost 3.5 percent per year on
average over the 2000-2009 periods. Italy’s total market share in world
trade has declined significantly since the mid-1990s, and the country has
not profited from increased demand in fast-growing emerging markets.


2.3.

Impacts on Italy’s economy

In an attempt to service its high public debt, Italy has to apply
austerity measures including a mixture of spending cuts and tax increases.
This policy has an enormous effect on the national income, causing
aggregate demand to contract and slowing down the economy that is
currently having negative growth ever since the global financial crisis in
2008.
Now, Italy’s government is facing a big challenge, dealing with public
debt requires cutting on expenditure, while keeping the economy to grow.
Additionally, the slow-moving pace of Italy’s government in dealing with
the debt crisis due to political disagreements has decreased market
confidence as investors feared that Italy would fail to take action.
The debt crisis also creates social instability in Italy. Due to the facts
that the economy is stagnate and slowing down, government is cutting on

social welfare, salary is not increasing though price is increasing; Italians
are being upset and frustrated with government policies.
Moreover, since austerity obviously means that less money will be
available to purchase goods and services, further contraction in Italy’s
economy will lead to even higher unemployment rate which is steadily
rising and has jumped to 11.7% in January, 2013 from 11.3% the month
before to hit its highest level for at least 21 years.
Regarding the bond market, the high public debt of Italy has led to a
sharp increase in the yields on the price of Italian government bonds. The
reason for rising bond yields is simple: if investors see higher risk


associated with investing in a country’s bonds, they will require a higher
return to compensate them for that risk.
Investors tend to dump their holdings for fear that Italy won't repay
their debts, creating a vicious cycle whereby the more the price goes down
as people offload Italian bonds for fear of them defaulting, the more the
yield rises, the more likely Italy won't be able to refinance its loans and the
more likely a default is.
Since Italy has the largest bond market in Europe and third-largest in
the world behind the United States and Japan, fluctuations in the bond
market become a more immediate problem. Many French and German
banks own a significant amount of Italian bonds, meaning that an Italian
default would result in major losses for these banks. The United States also
owns more Italian bonds than any other eurozone country’s bonds.
Therefore, if Italy were to default on its debt obligations, it would cause
massive repercussions globally.


2.4.

Policy reactions
a. Political change

Well-founded political system unquestionably lays a firm ground for
economical growth in every single country. The recent time turns out that
Italy is sinking in to a political turbulence and simultaneously suffering
from budget deficit. An urgent political shift needs taking into
consideration. Specifically, after consecutive years of corruption under
Prime Minister Berlusconi, Mario Monti airlifted into the Prime Ministry
in the late 2011 adopts a promising economy reformation in Italy. After the
appointment, Monti initiated a reform of entrusting two groups of experts
and politicians with an important mission of prestigious Politian
assemblage to “loosen the knots” among different parties.
Tax evasion in Italy has never been out of the top list of serious issues,
in reality, between a quarter and half of the GDP seems to be hidden to the
Italian tax authorities. Responding to this, Monti has decidedly switched
into stricter policies for this crime. Based on a new system introduced by
Italy's Inland Revenue agency, the government would properly find out
evaders by cross-checking incomes and spending. For those who are
caught red-hand, a high obligation fee must undoubtedly be paid with
contribution to state budget. In addition, the authorities are also taking step
by step measures to tackle corruption problem by launching higher level of
punishment.
The current state of high unemployment rate has led authorities of this
country to negotiate with Spain an agreement of setting up a mutual
committee aiming at unoccupied worker reduction, especially the ones


from 15 to 24, to summit to the European Union next June, 2013. While it

is realistically evident that Italy should slash the number of surplus lawmakers in Parliament which has a total of 945 elected members including
630 members (the Chamber of Deputies) and 315 members (the Senate of
Republic). If this solution comes into effects, Italia will undoubtedly lessen
the debt burden within a shorter time.

b. Economical change
Tourism is already known as the most profitable sector in the economy
of Italy. Italy government has seen the light of the tunnel as lending a
clutch of splendid ancient castles as hotels. Not to mention that some other
valuable tourist attracting properties also play as a potential source of
investment for Italy to tackle the massive debt. Italy officials are about to
assemble a list of classical architectural heritage abandoned for years to
manage the huge debt. One of the most noteworthy places of attraction on
that top list is the ancient prison Stefano, looking out Gaeta city, situated
on Vetotene isle, Naples bay.
As the matter of fact, Italy’s tax burden is basically high. Production
stimulation has positive effects in weakening the loop of new debt. In the
event of unstoppable public debt, Industry Minister said it was of
importance to re-launch consumption by calling lower tax burden for
companies. Also, by applying this, Italy would hold a glint of hope to
restore its strong economical status in the not so distance future.
Italian industry continues to be among the strongest exporting business
sectors in the world. One of the biggest importers of Italy is namely China


with exportation statistics shown each year of about £28.790 million
(Ministero dello Sviluppo economico 2011). This fact really stands a good
chance for policy-makers to apply a taxation markup to this segment of
export for an additional contribution to the state budget. Needless to say,
this policy also provokes domestic consumption in contribution to gaining

higher GDP.
Junk food, cigarettes, alcohol and other detrimental-to-health products
should probably be more excised on and so are luxurious goods due to its
negative effects and insensitiveness to small variations. In spite of an
influx of citizens’ disagreement, these two reasonable ways would
obviously bring additional receipts to the Treasury.
Monti calls for “European” solutions to the debt crisis after realizing
the risk of selling bonds to other threatening economies and European
Central Bank (ECB) is one of the most potential bailouts setting low bond
yield. On the 13th of September, Italy auctioned £6.5 billion of bonds to
ECB including £4 billion of 3-year bond rating 2.75% (compared with the
previous 4.65%) and £1.5 billion of 15-year bond rating 5.32% (compared
with the previous 5.9%) (William L. Watts). This was a good foreshadow
to this third European economy, Italy.


c. Social change
Along with political change, social modification is another highlighted
point that Italian government should take an eye on, say, the President
Napolitano suggested ceasing rising salaries of state workers in four
consecutive years from 2011 resulting from the harsh loan it is bearing.
Also, the authorities thoroughly implement painful social welfare cutting
such as pension, unemployment insurance…to give a hand to austerity
measures.
Systematic administrative division in this boot-shaped country
consists of central government, regional governments, provinces, and
municipalities. It holds a large number of provinces responsible for
infrastructural and budgetary planning.
In total of money allocated for this account, an amount is assigned to
workforce salaries and provincial investments, the rest number is

unidentified so that redistributing provincial accounts can obviously save
the budget let alone it bears the least harmful repercussions to the overall
society due to alternative administrative institutions.
Pension is terminologically known to worker compensation for their
long-term dedication to the national economy with an exception for
senators and deputies after five years mandate.
In 2009, the total expense for senator and deputy pension was
calculated £219.4 million; in the meantime their yearly contribution is only
£17 million (Giornale). Application for this remedy is expectedly to avoid
the budget deficit of £202.4 million per annum.


Prime Minister also states that a noticeable proportion of women and
adolescents have not actively participated in the economy while producers
are in shortage of human resource. Albeit the reasonably unsuitable
situation for motivation policies,
Monti calls out for as much as possible citizens indiscriminately age,
gender…to make a contribution to national GDP. Also, the Prime Minister
would willingly fix the retirement age to increase the national working
force.


III. Public debt in Vietnam and lessons from Italy

1. Overview of public debt in Vietnam
1.1.

Government revenues and expenses

In the case of Vietnam government, revenues are derived primarily

from taxes and a small part from capital incomes and non-refundable aids.
Vietnam's government revenues are relatively stable, ranging from 25-30
percent of GDP.
Government expenses include government consumption, government
investment expenditures and transfer payments. Starting from 2009, total
government expenditures have decreased due to the implementation of
government’s austerity policies to stabilize the economy.


1.2.

Budget deficit and public debt

a. Budget deficit
In the past ten years, Vietnam has been suffering from budget deficits.
The levels of budget deficit of Vietnam are considered high compared to
those of neighbor countries. Still, since 2011, Vietnam has been improving
its situation, offsetting half of its budget deficit.

Vietnam's budget deficit from 2001 to 2011 (% GDP)
200 200 200 200 200 200 200
1

2

3

4

5

6

Mo

7
-

200 200 201 201
8
-

9
-

0
-

1
-

-1.8 -1.1 -0.9 -0.9
1

F
Mo
F2
IMF

1.76 1.81 3.69 2.36 2.11

-4.9 -4.9
-6.9 -5.5 -4.9
4.86 4.99 5.65 4.58
2.7
3.2
0.30
2.35
0.19 1.31
2.18 0.54 7.17 5.19 2.69
8
5

AD
-3.5 -2.3 -2.2

0.2

-1.1

1.3

-1.0

0.7

-3.9 -4.5 -2.5

B
Source: Disclosure of State Budget (Ministry of Finance)

World Economic Outlook 2012 (IMF) and Key Economic
Indicators (ADB)
1 MOF1 – international practices (excluding amortization)
2 MOF2 – Vietnam practices (including amortization)


b. Public debt
It is considerably difficult to achieve an exact number for the sum of
government debt of Vietnam.
Still, it can be estimated that the level of public debt of Vietnam in
recent years has far exceeded the safety threshold. However, Vietnam
public debt is forecasted to be on the downward trend in the near future.


1.3.

Risks related to Vietnam public debt

Vietnamese Government can hardly rely on increasing revenues from
taxes in order to tackle public debt. On the other hand, it has to face
decreasing rate of economic growth if it is to cut down spending.
In recent years, Vietnam dong has been depreciating due to the global
financial crisis, which in turn inflates Vietnam’s foreign debt. Besides,
investors have ceased to consider Vietnam as a potential destination.
Those reasons prove that Vietnam can no longer rely on foreign debt.
Moreover, the European public debt crisis, especially in Italia, has alerted
Vietnamese policymakers of the risk of insolvency.
For a long time, Vietnam has suffered from bureaucracy, corruption
and misusage of government spending. Thus, Vietnam will have to invest
wisely the limited foreign debt that it currently holds in order to recover

the economy as well as regain investors’ confidence in its future.
2. The inferred lesson from the public debt crisis of Italy
Although Vietnam has not yet fallen into a debt crisis like Italy has,
we may do so if we don’t have appropriate measures to tackle the
sovereign debt problem. In this part, we will be discussing the lessons that
can be drawn from Italy’s case, as well as our modifications to those
solutions and our own suggestions to the situation that Vietnam is facing.


2.1.

Management policies

Due to certain characteristics of politics in Vietnam, there is no need
to establish a group of experts to deal with political conflicts among parties
about financial matters like there is in Italy.
However, we do need to set up a group of economic and financial
specialists in order to better consult the Ministry of Finance and the
Government on matters related to sovereign debt.
Besides, although unemployment in Vietnam is not at an alarming
level, the rate of highly-skilled and educated workers is rather low.
Therefore, capital resources should be reallocated so that education
becomes our focus, through acts such as general education be made
compulsory and career orientation be provided for every student.
Apart from the Italian’s lessons, we should practice publicizing
information on government budget and public debt in order to tackle public
debt and budget deficit. In Manual on Fiscal Transparency (IMF 2007), it
is clearly stated that:
“The government sector should be distinguished from the rest of the
public sector and from the rest of the economy, and policy and

management roles within the public sector should be clear and be publicly
disclosed.”
Also, the fiscal powers of the executive, legislative, and judicial
branches of government should be well defined, while responsibility need
to be distributed appropriately accordingly to each organization and
section. To do so, we should make improvements to the budget system law
or the constitution.


The relationship between the general government and state-owned
enterprises (SOEs) needs to be transparent as well, especially on public
finance.
In particular, the question of how profits from public corporations
should contribute to the government requires a clear and reasonable
answer. SOEs must release their financial statements to the public, making
profits and the portion that will be taxed open.
Likewise, government spending on behalf of public corporations must
appear in government budget statements as well as in these enterprises’
financial statements.


2.2.

Increasing government revenues and decreasing government

spending
Despite the high ratio of government revenue in the region, Vietnam
still suffers budget deficit and high rate of public debt. This is due to the
high level of public spending that was spent on recurrent expenditures, not
on investment and development. Therefore, Vietnam should reduce and

reallocate government’s recurrent expenditure effectively, starting with
cutting down on the administrative mechanism which is a cumbersome
trouble of the economy.
Streamlining this sector could be made through privatization of some
parts of the public sector such as education, public transport, information,
etc. However, these cuts need to be made as a roadmap because they may
leave negative consequences, especially unemployment. Inferring lessons
from Italy, we should prolong retirement age to not only alleviate this
problem but also reduce the burden of pension on the state budget.
The implementation of policies to reduce the burden of the budget
deficit and public debt has been applied in many countries. Specifically, the
austerity policies that the European countries have used to deal with the
debt storm in the area.
In Vietnam, the feasible measures to increase government revenues
could be conducted, such as increasing higher levels of taxation or VAT or
impose new taxes on detrimental and luxury goods, real assets and assets
with high values as well as levying greater taxes on people with high
income, using progressive taxation.


Still, we should decrease domestic tax rates and impose higher tax
rates on major importers of Vietnam, e.g. China, India and Korea, in order
to solve budget deficit as well as raise a higher level of demand for
domestic goods and services.
However, the application of these policies should be done carefully to
avoid the negative reactions from public as well as social unrest. If
possible, Vietnam surely overcomes the situation of its budget deficit and
high rate of public debt.