Italy is a high savings country. Its households dispose of a net worth of around 10 thousand billion euro and financial assets of over 4 thousand billion euro.  This means that in principle the national public debt of around 2 thousand billion euro could be absorbed by Italians themselves.  Moreover, the country has run for some years now a sizeable current account surplus, in the order of 3 % of GDP, which indicates a continuing domestic savings surplus.

The widely repeated assertion that Italy’s debt is mainly domestic is thus plausible at first sight. However, a closer look at the data reveals the need for two important qualifications.

First of all, Italian households own very little government directly.  All data sources agree that the direct holdings of Italian households amount to about 100 bn euro, or only 5 % of total public debt of about 2250 billion.  The explanation is simple: a lot of debt is held by Italian financial intermediaries (banks, insurance companies, investment funds, etc.) whose ultimate beneficiaries are Italian households.

When the government tried last November to circumvent the markets with a special bond for households it discovered quickly that it is difficult to change this pattern quickly.  The appeal to households to buy an important share of the debt failed.

Another implication of the dominance of financial intermediaries is that Italians read about interest rates and risk premia going up or down, but they do not perceive directly the implications of this for their own financial situation.  For example, the government might assure the public that bank deposits and bonds are safe, but given the exposure of banks to the government it is clear that any default by the government has to lead to losses for the bank’s clients.

The second, observation is that the share of the debt owed to foreigners is higher than often assumed.  Official statistics show that about 600 billion euros of Italian debt is held abroad.  But various estimates suggest that about one fourth of this consists of shares in Luxembourg or Irish investment funds owned by Italian households. The real foreign holdings amount to about 450 billion euro, only a bit over one fifth of the total.

But this is not all. A key, and often misunderstood, holder of Italian government debt is the Banca d’Italia, which holds about 400 billion euros of BTBs.  Most of them were acquired under the Quantitative Easing program of the ECB, called official ‘Public Sector Purchase Program’ or PSPP.   But the Banca d’Italia holds these 400 billion of BTPs under its own responsibility.  Moreover, the Banca d’Italia is part of the public sector and pays back to the Treasury most[1] of the interest it receives on these securities.  This implies that when the Banca d’Italia bought these BTPs, it was an operation between the left and the right pocket of the Italian government, without any change in the net debt of the government.

But the fact that the Banca d’Italia is part of the public sector also applies to its liabilities, which must be considered also as Italian public debt.  The liabilities of the Banca d’Italia which have increased the most since it started buying BTPs under the quantitative easing of the ECB are its liabilities towards the rest of the eurosystem (i.e. towards the ECB and the other national central banks) under the Target II payments system, which amount now to over 400 billion euro.

This means that, if one consolidates the BdI with the Treasury, as one must, about 400 billion euro of the debt of the Italian public sector is owed to foreigners.  Added to the 450 billion of foreign holdings mentioned above, this implies a total of ‘foreign debt’ of around 850 billion. The share of public debt is thus around 40-45 % of the total, still below one half, but almost two times higher than commonly assumed.

But this ‘foreign debt’ implicit in the Target II balances should not be considered a negative factor. The key advantage of the PSPP for Italy has thus been that this has transformed debt subject to market forces (BTPs) into opaque obligations towards the rest of the euro area, which, for the time being, carry no interest.  Moreover, the Target II debt does not need to be rolled over.  It constitutes thus a particularly stable source of (indirect) funding.  But the cost and the availability of Target II imbalances cannot be controlled by the Italian government.  The cost could increase rapidly once the ECB decides to increase interest rates and the volume will be reduced if the ECB decides so.  But both these risks seem remote at present. For the time being, however, the Italian government can count on a small, but significant savings from having low cost liabilities which do not need to be re-financed and are thus not subject to the ups and down of the spread.

[1] The Banca d’Italia essentially transfers every year to the Treasury all of its income minus costs and the dividend paid to its private shareholders.