Italy may look like Greece writ large, but the truth is more complex

Ever since the euro zone's sovereign-debt crisis began in earnest two years ago, the common fear has been that the sheer bulk of Italy meant it was too big for other countries to bail out, should it sink.

A quieter hope was that Italy's size might also save it. If investors rushed out of Italian bonds, went the whispered argument, there were few big markets where they could then park their euros and still get a decent return (the smaller German bond market could not accommodate everyone without yields falling sharply). Scared investors often rush into the big and liquid market for US Treasuries, despite anxieties about America's public finances. That safety-in-numbers logic ought to keep Italy from trouble, too.

Some hope: Italian bonds are now a badge of shame for banks who are rushing to dispose of them. Their ten-year yields have jumped beyond 7% and, once euro-zone yields reach these levels, they tend to spiral out of control.

For some this proves that Italy is an oversize Greece: a country with a debt burden that is too heavy for it to bear and, unlike Greece, for others to help shoulder. There are uncomfortable parallels. Both countries' public debts have long been bigger than their annual GDP. Both suffer crippling rigidities in their economies. But there are enough differences in Italy's finances, and enough potential in its economy, to mean it could stay solvent if its borrowing costs could be capped at, say, 6%.

Start with the finances. One reason why markets eventually shunned Greece, Portugal and Ireland was the uncertainty about how far their debts might rise. All three had huge budget deficits (so were adding to their debts at an alarming rate) and were struggling to keep their economies on track, while at the same time cutting spending and raising taxes. Greece's public debt was forecast to rise towards 190% of GDP, before some of its private-sector creditors agreed to a bigger write-off of what they are owed. Italy's public debt, by contrast, is set to stabilise at around 120% of GDP in 2012. Its government will run a small surplus on its "primary" budget (ie, excluding interest costs) this year, and an overall deficit of less than 4% of GDP, below the euro-area average.

Italy has fewer foreign debts than the other troubled euro-zone countries, as it ran only modest current-account deficits in the boom years. Its net international debt (what Italy's businesses, householders and government owe to foreigners, less the foreign assets they own) was 24% of GDP in 2010, not much above that of Britain or America, and well below the position in Greece (96%), Portugal (107%) or Spain (90%). Indeed Italy's overall private-sector debts are modest by rich-country standards. This matters for the nation's solvency. If less wealth goes outside Italy to service foreign debts, more is left to tax.

The healthy rate of Italian household saving underpinning this could be tapped by the government as an alternative to bond-market funding, which looks a lost cause. Because Italy's deficit is fairly small and the average maturity of the bonds it has already issued is quite long (around seven years), it would take a while for higher borrowing costs to make a huge difference to its interest payments.

Next year, Italy has €306 billion of bonds and bills coming due, around a fifth of its stock of capital-market debt, in addition to the budget deficit it has to finance. Assuming all new debt is priced at 7.5%, Italy's overall interest costs would rise by around 1% of GDP next year-steep but not yet crippling for the sovereign (though Italy's banks would struggle).

Italy's debt could be capped, but could it ever be reduced to a more comfortable level? Bold privatisation would go some way, but in the long run what is needed is faster GDP growth. The average Italian was worse off in 2010 than in 2000: GDP per head fell over the decade (see chart). Outsiders point to the lost option of devaluation to explain Italy's funk. But the root cause of Italy's lost export competitiveness is its dismal productivity growth.

The deeper causes of weak productivity are a two-tier jobs market, which protects the jobs of older workers in dying industries but traps youngsters in temporary work; the industry-wide wage bargains that mean businesses cannot match wages to productivity; the closed-shop professions and trades that are a barrier to innovation and efficiency; and so on.

Italy still has some world-class firms and brands, and an exporting prowess that could be built on. Yet it does not have enough firms of sufficient scale. The ubiquity of micro family businesses is related to Italy's rigid regulations, as are its tax-collecting problems. Small firms fall below the regulatory thresholds and are less often attached to the formal economy. If Italy is to carry its outsize public debts, it urgently needs to promote an environment where big businesses can flourish.

India telecoms corruption trial under way

The trial in India's biggest corruption scandal has begun in Delhi with the questioning of the first witnesses.

The scandal involves the alleged selling of mobile phone frequency licences for a fraction of their value.

Former telecoms minister A Raja and MP Kanimozhi are among 14 people from telecoms firms or government who have been charged. All deny any wrongdoing.

Auditors allege the mis-selling of the licences cost the exchequer nearly $40bn (£24.5bn) in lost revenue.

The BBC's Sanjoy Majumder in Delhi says the scandal has gripped the country and deeply embarrassed the government.

Lawyers' complaints

Last month, the federal Central Bureau of Investigation (CBI) framed charges including criminal conspiracy, forgery, accepting bribes and misuse of office.

The trial, in a special CBI court in the Indian capital, is expected to be long and complex.

Some 150 witnesses are expected to appear.

The trial began with complaints from lawyers that the room was too small to take defendants, lawyers, family members and the press.

However, proceedings got under way with the the judge calling the first prosecution witness, Anand Subramaniam, from Reliance Capital, part of the group owned by billionaire businessman, Anil Ambani.

After four hours of questioning, group president of Reliance, AN Sethuraman, was called to testify.

Raja is accused of selling mobile phone licences to firms at a fraction of their real value in exchange for bribes in 2008.

India has the world's fastest growing mobile phone market, with more than 700 million subscribers.

Prosecutors say Raja changed the eligibility criteria to favour certain firms.

If found guilty, the defendants could face a maximum sentence of life imprisonment.

The telecoms scandal has badly damaged the reputation of the government, which has been hit by a series of corruption scandals.

Our correspondent says that in India legal proceedings can often take years, but with the public outcry over corruption, everyone is hoping that this trial can be resolved relatively quickly.