Fundamentals — Italy and UK

This excellent article by Erik Nielsen points out that the UK and Italy have economies of roughly similar size. The UK is rated “Triple A” and funds itself at 1.6%. Italy is rated “A plus” and consequently funds itself 5.1%.

But Italy’s economy is strongly manufacturing based, and much of that is linked to German manufacturers. While the UK’s economy is heavier in “financial services”.

Italy’s debt is 20% higher than GDP while the UK’s is 20% lower. But fiscal tightening in Italy has already led to (forecast) surplus, while the UK is still operating with a deficit.

The UK might be able to increase exports by weakening its currency, but a) this would damage investors, and b) the theory doesn’t seem to have worked that well in practice.

Erik Nielsen is global chief economist at UniCredit and points out that investments in Italian bonds are therefore lower risk, and pay 3.5% more than similar investments in UK bonds.

The point at issue here is to do with mental models. Who do you trust? Which brand? The UK has historically had a stronger brand. But the new fundamentals do seem to favour Italy.

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