Greece's default this week is expected to increase borrowing costs for the Italian government and have a negative impact on the way international investors see the country. But experts say the most important near-term risks for Italy may be political more than economic.
This week Greece missed a 1.6-billion-euro (1.8-billion-U.S. dollar) debt payment to the International Monetary Fund, becoming the first industrialized country to ever default on a government debt payment. The development limits Greece's access to credit markets, and could eventually lead to its exit from the 19-nation euro zone.
The economic impacts of the developments on Italy are not small. According to Italian Minister of Finance Pier Carlo Padoan, Italy owns 37.4 billion euros (41.5 billion U.S. dollars) in Greek government debt, with around three-fourths of that in the form of contributions to the European bailout fund, and the rest bilateral loans.
Greece's default has sparked jitters among investors, driving up interest rates on government debt. Over the last four months, since speculation that Greece might default started to rise, the yield on Italy's benchmark 10-year bond more than doubled to 2.32 percent from 1.12 percent, reaching their highest yield level to since November. The spread -- the difference between the yield on Italian debt and that for a less indebted country like Germany -- has also increased in recent days.
On Thursday, the U.S. ratings agency Standard & Poor's estimated higher yields as a result of the Greek crisis would cost Italy 11 billion euros (12.2 billion U.S. dollars).
Italian Prime Minister Matteo Renzi said Tuesday that Italy was "out of the firing line" of Greece's troubles and for the most part, experts agreed saying that Italy is in a stronger position to handle such economic factors than it would have been a few years ago.
"There will be an economic impact, and it may even be significant, but it won't create a crisis for Italy," Antonio Villafranca, a senior research fellow with the Milan-based Italian Institute for International Political Studies, told Xinhua.
Nicola Borri, an economist with LUISS University in Rome, agreed: "Back in 2010 or 2012, a lot of the exposure to Greek debt was held by private Italian banks and so a default could have crippled the banking system," Borri said in an interview. "That's no longer the case."
Greeks will vote this weekend over whether or not to accept strict terms for more European Union bailout money, and if they refuse -- early polls say a "no" vote is the most likely outcome -- it could ultimately result in Greece being forced out of the euro zone. And that, experts say, could cause political problems for Italy.
"If Greece leaves the euro zone, that would only strengthen the position of the euro-skeptic parties and the populist parties in Italy," Villafranca said. "Renzi is pro-Europe and he benefits a lot from having a weak opposition. If that changes, it could create some problems for him."
How does Italy avoid that? Borri said one thing Italy should do is to push for a compromise agreement between Greece and its European creditors in order to assure Greece remains part of the euro zone.
Villafranca, meanwhile, said Renzi should stay focused on his ambitious reform agenda, which is seeking to change everything from tax and labor laws to updating the political system and reducing government spending. Villafranca said the reforms were Italy's best bet to assuring sustainable economic growth over the medium term.
"Renzi's reforms aren't important," Villafranca said. "They are fundamental."