Who would you lend to – Italy or Peston?

 
BBC Business Editor Robert Peston Would you lend money to this man?

Who would you expect to pay a higher rate of interest when borrowing for three years?

Me or the Italian Republic?

If you said "Peston", you are right. The markets apparently regard me as a worse credit risk than the government of the world's eighth largest economy - largely because individuals have a sorrier history in general of repaying what they owe than the public sectors of first-rank developed economies.

But here's the thing: the risk premium for lending to the slightly shambolic household of Peston, as opposed to the sovereign nation of Italy, is rather less than I expected.

According to those online money comparison websites, I can borrow £10,000 for 5.9% - with very few questions asked of me.

As for Italy, today it borrowed 3 billion euros for three years today at an interest rate 5.3%, in one of its regular bond auctions.

The gap between the interest paid by the two of us, 0.6% or 60 basis points (in the jargon), seems to put us in a similar borrowing category.

And before you ask, £10,000 is a bigger proportion of my annual earnings, than is 3 bilion euros as a proportion of Italian output or GDP.

So why is the Italian government's credit-worthiness perceived to be only marginally better than mine.

Well Italy starts with rather more debt than me - around 2 trillion euros or 120% of its GDP or income. My debt is a much smaller proportion of my income.

And Italian GDP is shrinking, as is mine - in real or inflation adjusted terms - but maybe not as fast.

Also in the coming year Italy has to borrow 450 billion euros in total to refinance maturing debt and its new borrowing needs. I have no debts that mature this year that need to be rolled over or refinanced.

What's more, Italy may have to fork out a few tens of billions of euros to recapitalise its banks - which is less than Spain's banking bill but rather more than the banking liability I face.

There's another thing: if demand for my output falls, I can always cut what I charge for my services; but if Italy's exports are perceived to be too expensive, it cannot cut their price because it has no independent currency to devalue.

All in all, and now that I think about it, I wonder whether I should be offended that it costs me more than the Italian Republic to borrow.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 93.

    Actually Delaware is used as the state of incorporation by many blue chip companies also. It has low state taxes, but it also has a very well sorted legal system for companies. It is not just a place for brass plates.

  • rate this
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    Comment number 92.

    80. Just_the_Fax
    "only spoiled by the 'Incorporated in Delaware" "

    Whilst the rules exist they will take advantage of them, they are accountants it's what they do. :)

  • rate this
    0

    Comment number 91.

    Think it would be safer to lend to the Peston household...by the way for completeness your table of bail-outs omits Romania in 2009 which received € 20 bln in 2009 from the IMF 12 bln/EU 8 bln. Cyprus is next.

  • rate this
    +1

    Comment number 90.

    "Well Italy starts with rather more debt than me - around 2 trillion euros or 120% of its GDP or income. My debt is a much smaller proportion of my income."

    You mean you don't have a mortgage? I suspect I am in the majority where my mortgage is more than 120% of my annual income.

  • rate this
    0

    Comment number 89.

    Lojas @88

    Does 400ch explain?

    Most oil goes to fire the engine, but some needed for lubrication
    If engine encrustation & wear neglected, lubrication costs rise

    Who can support 'non-employment & / or corruption of the able'?
    To escape excessive & growing debt, need 'work for real value'

    Need to end exclusion and perverse incentives
    And maybe another can of oil, to reach the garage?

  • rate this
    0

    Comment number 88.

    "You cannot fix an economy with too much leverage and too much debt with more leverage and more debt. 'Buying time' or trying to 'grow our way out' simply postpones, and makes worse, the day of reckoning." Chris Ciovacco - European Debt Crisis Explained

    http://www.youtube.com/watch?v=LKsZ1hqHBHU&feature=related

    Back-door bazookas are not a long term solution??

  • rate this
    0

    Comment number 87.

    Coming to it: how to be 'worth' self-investment

    Take off blinkers?

    Full employment, in it together, toil, not ever growing debt

    Only with state collective gain 'in mind' can we gauge properly the worth of individual contributions. Unequal 'earning' capacity, in eddies of failing economy, can easily be 'false signal'

    How else, but with equality, will our 'best brains' address 'toil for all'

  • rate this
    0

    Comment number 86.

    @Happyineuroland

    Just saw your comment...exactly right...same as my point!

    Every time MK announces another GBP dilution programme I pour myself a stiff drink in order not to get angry about him devaluing my savings.

    Have a slight headache this morning ;-)
    http://goo.gl/goC1u

  • rate this
    0

    Comment number 85.

    "....but if Italy's exports are perceived to be too expensive, it cannot cut their price because it has no independent currency to devalue."

    Don't forget that devaluing your currency is not the only way to restore competitiveness. It is quite a blunt instrument, because it also devalues savings.

    Long term, better to take wage cuts & restructure. Exactly what Germany has done over last ten years

  • rate this
    0

    Comment number 84.

    Seems I have to simply give £145.50pa to some other not unrelated entities regardless of performance. So, more of the same, really.

  • rate this
    0

    Comment number 83.

    What happens to the loan if the borrower sells up?

    Is Peston preparing to surrender his sovereignty to Brussels, Berlin, ECB, Goldfinger Sachs, Bilderberg or Opus Dei?

  • rate this
    0

    Comment number 82.

    60.TheGingerF
    14th June 2012 - 21:47
    Robert, to carry out a proper comparison I would need to know just how far you can kick a can down the road. Italy appear to have a phenomenal ability in that department.
    ======
    It's relative.

    The can remains stationary, Italy retreats.

  • rate this
    0

    Comment number 81.

    I, honestly, am able to borrow money at a far cheaper rate than either Italy or Spain, and I don't have any visible means of repayment.

    I'm the George Osborne of this blog.

  • rate this
    0

    Comment number 80.

    46: ASM. A nice informative letter, only spoiled by the 'Incorporated in Delaware" bit at the top... hedge fund / bankster central. Delaware, the state of brass plates, umbrella companies and low corporate taxation.

    To lead by suggestion, one has to behave properly, don't you think?

  • rate this
    0

    Comment number 79.

    Robert, you should write more columns like this. There is a direct relationship between our personal budgets and national ones. In a way, it's comic, but it is more than that. And it leads one to back Angela Merkel's approach to national debt. In spite of Keynes, more natonal debt, like more personal debt, is BAD.

  • rate this
    0

    Comment number 78.

    On LW 252 a working woman was explaining how pious she was but couldn't pay for ceremonial gowns that those on benefits could afford. The host was rude to her. The next caller had been in business for 34 years but couldn't hire staff because they put it to her that she would have to beat the E500 they were getting on benefits. Enough said.

  • rate this
    0

    Comment number 77.

    I would bet on you.

    Italy is strange. They don't replace themselves despite pressure from the UN. The average family is one child. They had communist parties long after "the Russian peasant president" wrote his autobiography in 1967 that resulted in the elimination of the British communist party who were themselves shirkers for not having read Orwell, Berlin or Popper in the 1950s.

  • rate this
    -1

    Comment number 76.

    49.Sutara

    Just wanted to point out RP's narrow reporting and his inability to understand devalueing and inflation, is far worse than lowering asset values and wages if necesarry. The Germans know this, but he never reports the latter. (Perhaps he has a big mortgage).

    Better to have a stable currency, than hyper inflation.

    Check Hungary, Argentina,

  • rate this
    0

    Comment number 75.

    What would you do if you had 3 billion. Lend to lots of Pestons? on average how much money would you get back? how many Pestons would go to the wall leaving you with their worthless house to sell? Germany? interest less than inflation. Italy? Partial default and who wins you or the ECB? Shares in a growing company? in the EU? So who is putting in all the money ECB, IMF, BOE, etc? privatisation?

  • rate this
    0

    Comment number 74.

    @43. zipperty
    5 HOURS AGO
    mackemade 36

    I think that conventional wisdom on these blogs has it that the markets will turn on us after they have given France a doing over.

    ++++
    They probably should have already (with the amount of private debt the UK has) but haven't perhaps for no other reason than they are running out of places to put the canons.
    They can't shoot at London from London

 

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