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Sub-prime crisis Italian style? Part 2

A short time ago I wrote about an interesting conversation I had with a union rep while I was down at the 442 pub. This guy told me about the number of people who were struggling to meet mortgage payments.

Well, guess what? Mario Draghi, the current head of the Bank of Italy, has made a couple of interesting statements recently. First, he stated that Italian salary levels are low compared to other countries in the European Union – 25% lower than French salaries and 20% lower than salaries in the UK. Then, Mr Draghi made an even more interesting observation. He commented at a recent congress that Italians are going to find it difficult to meet mortgage payments.

Sub-prime crisis Italian style anybody? It sounds as though there is a possibility, despite Italian lenders being legally restricted to ensure that repayments do not exceed a third of monthly income.

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However, even though Mr Draghi is quite rightly ringing alarm bells, he is missing something. That something is that great efforts are being made to ensure that Italians fall further and further into debt, much in the same way as Americans and Britons have done.

The question is why is this the case. The answer is quite simple. There is an enormous amount of money to be made from servicing debt. If you have no debt, you do not owe anyone interest, and lenders cannot maximize interest related income. This market requires some stimulation – more people need to be put in a situation where they need some form of finance, be it short or long term. By keeping salary levels low, the market for finance automatically grows as the cost of living rises. And prices in Italy are moving up, much to the delight of lenders, I’m sure, and more and more Italians are being forced into seeking finance. As I have observed before, lending institutions are springing up almost daily in Italy, because they know that they stand to make millions out of finance related interest payments.

Italians are wise and effective savers, not to mention their being rather adept keeping their tax liability at a minimum, but I wonder what the situation will be in two generations time. Will Italy see house repossession levels on the same scale as the US and UK? Time will tell.

Of course, I am but a mere sprat in the big sea of things, but Mario Draghi is a whale, and while I may be wrong, I doubt he is.

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