The surprising history of Italy and sovereign default

Italy doesn't do sovereign default (Photo: Getty)

There is a great deal of wild talk in financial markets about how Italy is "bankrupt", about how default there is "inevitable", and how it would be an Italian default that brought down the euro (rather than Italian default, or depreciation in its currency relative to the German currency, being a risk in the event that the euro collapses - my own view). During the past couple of years we have become used to stories of how common sovereign default has been for Greece, over the past 170 years. But how many people are aware of how often Italy has defaulted, historically?

Well, readers may remember – if they ever read my blogs, at least – that Italy faced a similar debt to GDP ratio to today in the 1990s, without defaulting or inflating or growing fast, and did so at higher interest rates than it is being charged even at current elevated levels. But do they remember when it last did default?

It being the 2010s, presumably readers will rush off now to check out the Wikipedia entry on sovereign defaults. You will find no entry for Italy there. That list is incomplete in a number of regards – for example, it does not include the defaults of France and Britain on their First World War debts to the US in the early 1930s. France began defaulting in 1932. Britain began defaulting in 1933. Italy – which of course was one of the allies of France and Britain in the First World War – was the last World War I ally to default. The only Italian default I can identify, historically, was that from 1940, when it suspended payments to its then World War II enemies.

Sovereign default is almost always a choice – a matter of appetite to pay, rather than ability. Britain and France were not out of assets in the 1930s, any more than Greece is out of assets now. Because it is a matter of choice, it is a reflection, as much as anything, of culture and history. Italy simply has no history of peacetime sovereign default. It doesn't do it. Instead, it has a history of having borne very large government debt to GDP ratios and paid. That is one key reason it has found it possible to build up such a high debt to GDP ratio.

This doesn't in itself prove that the Italians will not default this time. But it is one very important way in which Italy is totally unlike Greece.