important your attention is drawn to the statement on the back cover of this report which affects your rights.
Analyst: Rolf Danielsen. Tel : +46 8 763 83 92. E‐mail :
Italy has not participated in the housing and credit boom of its peers but neither has it
used recent years’ strong economic tailwinds to restructure its rigid and uncompetitive
economy. Burdened by one of the highest government debt levels in the world, many
analysts and investors are foreseeing Italy approaching the day of reckoning. 

Country Risk Analysis
ÅçåíáåìÉ. In 2008, lo lle surprise of many economisls, IlaIy vas lle firsl Weslern
Luropean counlry lo be lil by lle gIobaI crisis and officiaIIy lo enler recession.
Beginning lle year al a posilive nole vill 0,4° grovll equivaIenl lo an annuaIized
1,7° grovll, lle second quarler slalislics came in vill a sIigll faII in GDI of 0,2°.
Tlal number increased lo a drop of 0,9° in lle llird quarler and mosl anaIysls nov
expecl lle sIide lo lave conlinued vill a 1,6° decrease of economic aclivily in lle
Iasl quarler of 2008. Ior lle vloIe year, llal vouId slrinI lle economy by around
one percenl. Ialesl indicalors suggesl lle silualion may become vorse before
gelling beller. In November, induslriaI oulpul vas dovn 2,3° acceIeraling lle
dovnlurn from a negalive 2,1° in Oclober, mainIy refIecling lle rapid faII of many
exporl marIels. Ioreign orders sIumped 14° in Oclober-November poinling lo
conlinued induslriaI veaIness going inlo 2009. Tle induslriaI performance
indicalor for Ianuary dropped furller lo 32, veII beIov lle 50-marI llal separales
conlraclion from expansion. Observers lave been scaIing dovn lleir expeclalions
for 2009. Recenl eslimales are in lle range of a negalive 2-3° maIing IlaIy one of
lardesl lil counlries in Lurope. We eslimale lle sIump lo more llan 3° in 2009.

ëÉÉã=ìåÑ~áê. LarIier
llis decade, IlaIy
valcled lle credil
financed consumer
and lousing boom
llal looI pIace in
many oller
Luropean counlries
moslIy from lle
sideIine, llereby
avoiding lle
ITALY: Government debt/GDP
1980 1985 1990 1995 2000 2005 2010
The government debt ratio rose rapidly in the 1980s but
was reduced again in the run up to the euro entry in 1999.

This note has benefited from comments from Mats Galvenius, SEB, Client executive.
However, any errors or misjudgments remain the sole responsibility of undersigned.
SEB Merchant Banking Country Risk Analysis February 2, 2009

experienced by Spain, UK and ollers. Bul on lle oller land, IlaIy did nol seize lle
opporlunily presenled by a favourabIe gIobaI environmenl lo reslruclure one of
Lurope's mosl rigid and bureaucralic economies, rigidilies llal are parlIy lo be
bIamed for lle grovll of lle informaI seclor vlicl comprises some 25° of aII
economic aclivily compared vill an eslimaled 15° in peers. Moreover, lle counlry
conlinues lo be leId bacI by infIexibIe Iabour marIel lradilions, an overreguIaled
services seclor and a poIilicaI syslem llal molivales quicI fixes raller llan Iong lerm
soIulions. Mosl of aII, lle slale budgel las remained slrucluraIIy vuInerabIe as no
governmenl las dared lo fundamenlaIIy correcl lle causes lo ils underIying
imbaIances. Slarling vill a Iarge governmenl debl llal is IiIeIy lo lave reacled
106° of GDI by lle end of 2008, in a vorsl case scenario lle silualion couId become
dynamicaIIy unslabIe depending on marIel reaclions.

^=äçåÖ=ëí~åÇáåÖ=éêçÄäÉã=áë=ÅçãáåÖ=Ä~Åâ=ïáíÜ=~=îÉåÖÉ~åÅÉ. IlaIy's nalionaI debl
probIems go vays bacI lo lle 1980s and earIy 1990s vlen Iax fiscaI poIicies under a
Iong succession of frequenlIy clanging governmenls, mosl of lle lime represenling
lle same ruIing cIass of cenlre-rigll poIilicians, year afler year run Iarge fiscaI
deficils. Tley vere viIIingIy financed by llrifly IlaIian louseloIds unliI lle debl lad
reacled an oversized proporlion of more llan 120° of GDI. Il vas IlaIy's slrong
desire lo parlicipale in lle Luropean Monelary Union llal evenluaIIy forged
consensus lo slop lle fiscaI profIigacy. Over-vinning doubls among oller founding
fallers of LMU lo admil a counlry vill a governmenl debl IeveI lvo limes
exceeding lle recommended Iimil, IlaIy joined lle euro vlen Iauncled in 1999.
MarIels vere quicI in vieving llal as a seaI of approvaI by lle slaIvarl defenders of
fiscaI prudence, incIuding lle IederaI RepubIic of Germany. As a consequence,
inleresl rales on IlaIian governmenl debl feII slarpIy lo aIign vill llose of lle oller
LMU counlries. WliIe improved confidence presenled a respile lo consoIidale lle
lolaI fiscaI baIance laving aIready aclieved a primary surpIus of 6° of GDI in lle
Iale 1990s, lle governmenl under IM BerIusconi used mosl of lle money freed by
reduced debl service for lax reIief or lo boosl oller governmenl expendilures. As a
resuIl, lle primary surpIus decIined lo 1° of GDI, bul llanIs lo an environmenl of
Iov inlernalionaI inleresl rales IlaIy vas sliII abIe lo meel lle Maaslricll crileria for
lle 3° of GDI-Iimil on lolaI governmenl deficil.

i~ëíJÇáíÅÜ=~ííÉãéíë=íç=êÉëíçêÉ=ÑáëÅ~ä=éêìÇÉåÅÉ. Tle cenlre-Iefl Irodi-governmenl
llal looI office in 2005 sel oul lo slop lle erosion of fiscaI baIances bul vill lle
liniesl possibIe parIiamenlary majorily il couId do IillIe. Some success in videning
lle lax base and figlling lax evasion, nolvillslanding, llese aclievemenls vere far
slorl of lle needed fundamenlaI overlauI of governmenl accounls and enlilIemenls,
incIuding pensions for a groving army of governmenl relirees. Tle second
BerIusconi governmenl llal came lo pover foIIoving Iand-sIide viclory in eIeclions
of earIy 2008, vas aIso quicI lo Iauncl a fiscaI consoIidalion program aiming al a
budgel deficil al zero by 2011. Tlal lasI las nov been seriousIy compIicaled by lle
unexpecled sIoving of lle gIobaI economy. In addilion, as poinled oul by severaI
observers, lle IM's allenlion in lis firsl year in office may aIso lave been diverled
by lle nev corruplion clarges from lle pubIic proseculor.

j~êâÉíë=ï~âÉ=ìé=íç=êáëáåÖ=êáëâëK Will fading confidence in lle success of lle nev
fiscaI consoIidalion efforl, observers lave begun lo projecl a videning fiscaI deficil
and a groving debl ralio eslimaled lo reacl 110° of GDI al lle end of 2009. WliIe
sliII 12 percenlage poinls slorl of lle lisloricaI peaI before IlaIy's euro adoplion, il is
no Ionger difficuIl lo painl a piclure vlere llal record couId be broIen villin lle
nexl 2-3 years provided conlinued gIobaI veaIness nov being porlrayed as lle main

SEB Merchant Banking Country Risk Analysis February 2, 2009

scenario by lle nev US adminislralion. In lle evenl, marIels lave begun lo
differenliale slarper belveen debls of differenl Luropean sovereigns, incIuding of
llose villin lle euro-zone, vill IlaIian governmenl bonds becoming lle vorsl
performer, second lo Greece. Tle 1,5 percenlage poinl ligler inleresl clarged by
inveslors for loIding sovereign debl of IlaIy compared vill sovereign debl of
Germany of lle same malurily is one piece of evidence . Higler inleresl rales for
IlaIy and oller fiscaIIy vuInerabIe counlries porlend lle danger of rales rising lo a
IeveI vlere lley couId lrigger unsuslainabIe debl dynamics. In sucl silualions
counlries in lle pasl lave been abIe lo breaI oul of lleir predicamenl by engineering
surprise infIalion. Being a member of lle euro-zone, IlaIy cannol do llal on ils ovn.

tÜó=Çç=ã~êâÉíë=í~êÖÉí=fí~äó\==In 2009, mosl euro-zone counlries viII experience
groving budgel deficils, and in some cases, incIuding Spain, lle delerioralion viII be
slarper llan in IlaIy. In Irance, lle budgel deficil for 2009 is expecled al more llan
5°/GDI sIigllIy above projeclions for IlaIy. AIllougl lle UK is nol a eurozone-
member, il is remarIabIe llal giIls lave nol suffered reIalive lo bunds in recenl
monlls despile lle slarp increase in projecled governmenl deficils for lle nexl fev
years lo 8°/GDI incIuding fiscaI rescue pacIages for aiIing Brilisl banIs. In lle
case of IlaIy, by conlrasl, observers regard lle banIing seclor as reIaliveIy sound,
larnisled onIy by lle risI of a coIIapse in CenlraI and Laslern Lurope, vlere lvo of
ils Iargesl banIs, Unicredilo and Inlesa, lave invesled leaviIy. S&I, lle raling
agency, las eslimaled lle conlingenl IiabiIily of IlaIian banIs lo lle sovereign al 10-
20° of GDI, a reasonabIy moderale number in an inlernalionaI comparison.
Moreover, IlaIian louseloIds are cIearIy Iess Ieveraged llan louseloIds in Spain, lle
UK, IreIand or lle US. IinaIIy yel imporlanlIy, laving mainlained an overaII
baIance in ils exlernaI accounls ÷ currenl accounl deficil/GDI around 2-3° in recenl
years, IlaIy is nol excessiveIy indebled lo foreign counlries, vlereas lle opposile is
lrue for lle UK and oller peers. Being indebled lovard ils ovn popuIalion raller
llan lo foreigners, may be an advanlage even llougl cross-border capilaI mobiIily
undermines lle argumenl.
Spread to Bunds
Government Benchmarks
Italy, 8 Year, EUR Spain, 8 Year, EUR France, 8 Year, EUR Greece, 7 Year, EUR United Kingdom, 8 Year, GBP Ireland, 5 Year, EUR
Source: Reuters EcoWin
mar maj jul sep nov jan
8 - year

SEB Merchant Banking Country Risk Analysis February 2, 2009

tÉ~â=äçåÖ=íÉêã=éêçëéÉÅíë. WliIe marIels may lave gollen IlaIy vrong in lle slorl
lerm lley may be rigll in lle Ionger run. Reasons for groving inveslor concerns
• very veaI demograplics vill a rapidIy ageing popuIalion, a Iarge parl of il
÷ in parlicuIar pubIic empIoyees -- benefiling from an overIy generous bul
under-funded slale pension syslem
• veaI produclivily grovll over severaI years since euro-enlry and an
obsoIele induslry slruclure based on Iov vage aclivilies supporled by an
army of lemporary vorIers from abroad many of llem vorIing iIIegaIIy in
lle informaI seclor. AIllougl llere are cerlainIy segmenls of IlaIian
businesses, incIuding many of lle SMLs, llal perform mucl beller llan lle
average, lle aggregale impression since euro enlry is of a counlry vlere
more and more peopIe produce lle same year afler year. (Clarl beIov.)
Tlal means decIining or even negalive (Iabour) produclivily.
• reduced
incIuding vis-à-vis
Iov-cosl counlries in
CenlraI and Laslern
• a fraclious poIilicaI
syslem llal does nol
consensus for
unpopuIar auslerily
poIicies lo lle Iong
lerm benefil of lle
• unfavourabIe
malurily slruclure of governmenl debl (annuaI refinancing ralio of 30°)
(Annual GDP growth versus annual employment growth)
Expenditure Approach, Production Approach, Gross Domestic Product, Constant Prices, Cal Adj, EUR, 2000 prices [ar 4 quar
Employment by Industry, Total [ar 4 quarters]
Source: Reuters EcoWin
1988 1992 1996 2000 2004
Since euro-entry, Italy has remained a strong job creator (red
line) but GDP growth (blue line) has flagged. That means little
addition to output despite many new hands, or statistically
speaking: low productivity growth. Prior to euro-entry, GDP
grew faster than the labour stock.
• deep division belveen a prosperous norll and an impoverisled soull. Tlal
is even refIecled in lle presenl coaIilion governmenl vlicl incIudes lvo
pro-norll separalisl parlies. Some lave specuIaled llal division couId breaI
up lle counlry before il broIe vill lle euro (see beIov).

iÉ~îáåÖ=íÜÉ=Éìêç\ IinaIIy, a groving concern among inveslors is llal in a vorsl case
scenario IlaIy may find Ieaving lle euro as lle Ieasl painfuI soIulion lo ils
predicamenl as llal vouId aIIov lle governmenl lo infIale and devaIue ils vay oul
of lle debl probIems. Tlis is a compIicaled queslion indeed and lle ansver depends
nol onIy on IlaIy bul aIso on lle reaclion of lle oller euro-counlries. Sucl a decision
by one of ils members vouId lave negalive repercussions on aII of llem. Tle ollers
couId llerefore decide llal lleir Ieasl painfuI oplion vouId be lo supporl lle
lroubIed counlry and basicaIIy baiI il oul. Hovever, llal migll nol be cleap eiller
and vouId risI selling a bad precedence. Hence lle decision may nol faII oul in
favour of a baiI oul. -- Wlalever governmenls may llinI or nol llinI, al lle end of
lle day vlal mallers is lov marIels beIieve governmenls viII acl because llal
delermines lleir appelile fro lle sovereign debl in queslion.

We see no poinl in pursuing llese consideralions any furller villin lle scope of llis
nole. Mosl anaIysls sliII asserl llal lleir main scenario is for lle euro-zone lo remain
inlacl for lle foreseeabIe fulure. Tlal is nol unreasonabIe given aII lle poIilicaI
preslige vesled in lle enlerprise despile lle ligl price llal may cosl. Al lle same
lime il is aIso lard lo ignore lle facl llal conlinualion of presenl marIel lrends

SEB Merchant Banking Country Risk Analysis February 2, 2009

carries lle risI, aIbeil sliII smaII, of becoming a seIf-fuIfiIIing proplecy. In lle case of
IlaIy il las been specuIaled llal lle risI premium on nev sovereign issues couId
become ligler llan prior lo euro-enlry, in vlicl case lle euro for IlaIy did nol bring
lle benefils many lad expecled. To maIe sure, llese refIeclions are nol meanl as a
crusade againsl IlaIy. SeveraI oller counlries may lave joined lle euro or be lopefuI
of soon joining il parlIy in lle lope of soIving confidence probIems vis-à-vis
marIels. Hovever, a euro vieved as a currency of free-riders vouId IiIeIy sinI lle
enlerprise sooner raller llan Ialer.

|tc|u´s rctinv |cs cccn un!cr !cunucr! prcssurc |cr sctcrc| uccrs cn! in 2006 tuc
intcrncticnc| rctinv cvcncics !cunvrc!c! t|c sctcrcivn rctinv cnc nctc|. |n t|c ccsc c| ScP
t|ct crcuv|t t|c rctinv !cun cc|cu AA. t|ct is cut c| c rctinv crcc ncrmc||u rcvcr!c! cs
“sc|c¨ cu mcst intcstcrs. As suc|. |tc|u´s rctinv !cpcrtc! uit| mcst ct|cr O|CD ccuntrics.
ScP justi|ic! its !ccisicn ccccusc c| t|c mcnu structurc| !c|icicncics in t|c cccncmu cn!
c|sc |tc|u´s cppcrcnt incci|itu tc rcstcrc ccmpctititcncss cs t|ct |c! t|c pctcntic| tc cxpcsc
t|c sctcrcivn´s tu|ncrcci|itu tc c!tcrsc s|cc|s. ccccr!inv tc t|c cvcncu.

W|i|c t|c cxtcrnc| rctinvs cn! t|c mcr|ct pricinv c| sctcrcivn !cct prcti!c c c|uc tc t|c
!ctcrmincticn c| t|c crc!itucrt|incss c| t|c vctcrnmcnt. ccuntru ris| !ccs nct ncccsscri|u
|c||cu. Icr cxcmp|c. s|cu|! t|c sctcrcivn !c|cu|t cut t|c ccuntru sti|| rcmcin in t|c curc-
zcnc. intcstcrs miv|t c|ccsc nct punis| pritctc issucrs. Hcuctcr. in t|c ccsc c| |tc|u scmc
ccscrtcrs |ctc !ccmc! suc| c sccncric un|i|c|u cs t|c vctcrnmcnt |cr cnc t|inv ucu|!
|crsc|c t|c ccnc|its c| !ctc|ucticn in its !c|cu|t. Dctc|ucticn ucu|! c||cct c|| issucrs cn!
mcnu c| t|cm miv|t |c||cu t|c vctcrnmcnt cn! tc|c t|c cppcrtunitu tc rcncminctc t|cir !cct
intc !ctc|uc! “|tc|icn curc¨(cr “ncu |irc¨). c||cctitc|u !c|cu|tinv in t|c prcccss. Scccn!. c
sctcrcivn !c|cu|t uit|cut !ctc|ucticn is un|i|c|u c|sc ccccusc it ucu|! ccrru t|c !cnvcr c| c
sctcrcivn cc||cpsc cs t|c tcx ccsc ¡uic||u crc!c!. Otcrc||. s|cu|! suc| c sccncric mctcric|izc
uc cc|ictc t|crc ucu|! cc c ccnnccticn cctuccn ccuntru cn! sctcrcivn ris| in t|c ccsc. t|ct
mcu ct cnutimc s|cu up in t|c pricinv c| pritctc !cct cs uc||. Avcinst t|c ccc|vrcun! c|
suc| ccnsi!crcticns cn! cs t|c v|ccc| cut|cc| |cs ucrscnc! sivni|iccnt|u ctcr t|c |cst uccr
uit| t|c impcct t|is ccn |ctc cn |tc|u. uc scc crvumcnts |cr ScP´s !cunvrc!c in 2006 ccinv
incrccsinv|u justi|ic!.

Key ratios 2009
IopuIalion (miIIions) 60
GDP/capita ($) 34
GDP (change) -3,7%
Inflation 0,6%
Curr.acc. balance/GDP -2,4%
Reserves/imports (months) 1,1
Budget balance/GDP(*) -5,0%
Government debt/GDP(*) 110%
Graph: Like Hong Kong, Italy is strong on information
and resilience, but clearly weaker on macro balance. The
absence of event risk, by contrast, flatters the risk profile
of Italy. Italy's reserves are small, but its liquidity is still
strong being a part of EMU.
Iilcl: AA-
S&I: A+
Hong Kong
Absence of
event risk
Macro balance
Italy Hong Kong

SEB Merchant Banking Country Risk Analysis February 2, 2009


Key data: 2004 2005 2006 2007 2008 2009 2010 2011
GDP (bill. US$) 1729 1778 1861 2104 2313 2044 2209 2277
GDP/capita (US$) 30 30 32 35 39 34 37 3
GDP (change) 1,4% 0,7% 1,9% 1,4% -0,9% -3,7% 0,0% 1,4%
Investments/GDP 21% 21% 21% 21% 21% 21% 21% 21%
Budget balance/GDP* -3,5% -4,2% -3,4% -1,9% -2,8% -5,0% -5,3% -4,8%
Govt debt/GDP** 104% 106% 107% 104% 104% 110% 114% 115%
CPI inflation (%) 2,2% 2,0% 2,1% 1,8% 3,3% 0,6% 1,0% 1,8%
Money demand (%) 12,9% 17,0% 13,6% 7,9% -34,0% -37,0% 14,3% 13,3%
Stock prices 21089 25083 29029 31847 22084
Interest rates 2,1% 2,2% 3,1% 4,3% 4,6% 1,5% 1,2% 2,0%
Exch. Rate ($)
Trade/GDP (%) 32% 34% 36% 35% 33% 35% 34% 36%
Oil price (Brent) $38 $54 $65 $73 $98 $45 $59 $67
billions US $
Export of goods 283 299 334 365 378 358 375 408
Imports of goods 274 299 344 364 379 358 382 416
Other: -25 -30 -38 -52 -71 -48 -52 -51
Current account -17 -30 -48 -51 -72 -48 -60 -59
(% of GDP) -1,0% -1,7% -2,6% -2,4% -3,1% -2,4% -2,7% -2,6%
FDI -2 -21 -3 -52 -66 -51 -55 -
Loan repayments
Net other capital flows
Balance of payments
Reserves 2
5 23 24 28 32 36 38 44
Total debt 604 614 800 1 038
o/w short term debt
Sources: Oxford Economics and SEB estimates.
Rating history
Fitch (eoy) AA AA AA- AA- AA-
S&P (eoy) AA AA- A+ A+ A+
Type of government: Parliamentary Democracy
Next elections 2013
Latest PC deal None
Latest IMF arrangements None
I t a l y , M i l a n S E , M t a , M I B 3 0 I n d e x , C l o s e , E U R
S t o c k e x c h a n g e
S o u r c e : R e u t e r s E c o W i n
2 0 0 1 2 0 0 4 2 0 0 7
1 5 0 0 0
2 0 0 0 0
2 5 0 0 0
3 0 0 0 0
3 5 0 0 0
4 0 0 0 0
4 5 0 0 0
5 0 0 0 0
5 5 0 0 0
I taly, E ur o p e an C o m m is s io n, , C P I , A ve rag e , E UR
R e a l E ff ec t iv e E x c h a n g e R a te In d e x
a r 4 q ua rte rs
S o u rc e : R e u te rs E c o W i n
2 0 0 1 2 0 0 4 2 0 0 7


- 4
- 2
Industri a l produc ti on a nd new orders
P roduc ti on, By Indus try, Overal l , TOTAL, Total i ndus try, Li nk ed and Rebas ed
New Orders , Manufac turi ng, Overa l l , D, Total
S ou rc e: R eu ters E co Wi n
2000 2002 2004 2006 2008
Consumer Prices
ar 12 months
Source: Reuters EcoWi n
2000 2002 2004 2006 2008


SEB Merchant Banking Country Risk Analysis February 2, 2009




Tle informalion in llis documenl las been compiIed by SLB Merclanl BanIing, a
division villin SIandinavisIa LnsIiIda BanIen AB (pubI) (“SLB¨).

Opinions conlained in llis reporl represenl lle banI's presenl opinion onIy and are
subjecl lo clange villoul nolice. AII informalion conlained in llis reporl las been
compiIed in good faill from sources beIieved lo be reIiabIe. Hovever, no
represenlalion or varranly, expressed or impIied, is made vill respecl lo lle
compIeleness or accuracy of ils conlenls and lle informalion is nol lo be reIied upon
as aullorilalive. Anyone considering laIing aclions based upon lle conlenl of llis
documenl is urged lo base lis or ler inveslmenl decisions upon sucl invesligalions
as le or sle deems necessary. Tlis documenl is being provided as informalion onIy,
and no specific aclions are being soIiciled as a resuIl of il: lo lle exlenl permilled by
Iav, no IiabiIily vlalsoever is accepled for any direcl or consequenliaI Ioss arising
from use of llis documenl or ils conlenls.

SLB is a pubIic company incorporaled in SlocIloIm, Sveden, vill Iimiled IiabiIily. Il
is a parlicipanl al major Nordic and oller Luropean ReguIaled MarIels and
MuIliIaleraI Trading IaciIilies (as veII as some non-Luropean equivaIenl marIels)
for lrading in financiaI inslrumenls, sucl as marIels operaled by NASDAO OMX,
NYSL Luronexl, Iondon SlocI Lxclange, Deulscle B∏rse, Sviss Lxclanges,
Turquoise and Cli-X. SLB is aullorized and reguIaled by IinansinspeIlionen in
Sveden: il is aullorized and subjecl lo Iimiled reguIalion by lle IinanciaI Services
Aullorily for lle conducl of designaled inveslmenl business in lle UK, and is
subjecl lo lle provisions of reIevanl reguIalors in aII oller jurisdiclions vlere SLB
conducls operalions.

SLB Merclanl BanIing. AII riglls reserved.