June 25, 2013

Italy is facing a EU bailout within 6 months

While the Italian press is rife with big headlines on Berlusconi's clusterfuck and his conviction  to seven years in prison and a lifetime ban on holding public office; the italian economy is deteriorating faster and faster.
The Italian government is giving few signs of intelligent life and treasury investors are starting to lose patience.
All things considered is not surprising that Mediobanca, Italy’s second biggest bank, said its “index of solvency risk” for Italy was already flashing red as the worldwide bond rout continued into a second week, pushing up borrowing costs.

The report warned that Italy will “inevitably end up in an EU bail-out request” over the next six months, unless it can count on low borrowing costs and a broader recovery.

As Ambrose Evans Pritchard noted:

“Time is running out fast,” said Mediobanca’s top analyst, Antonio Guglielmi, in a confidential client note. “The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now in special crisis administration.”

Italy’s €2.1 trillion (£1.8 trillion) debt is the world’s third largest after the US and Japan. Any serious stress in its debt markets threatens to reignite the eurozone crisis. This may already have begun after the US Federal Reserve signalled last week that it will begin to drain dollar liquidity from the global system.
The ECB has already backed away from earlier plans to steer credit to small businesses in the Club Med bloc. The Italian banking association said it was bitterly disappointed by the latest break down in eurozone talks on a banking union, warning that it leaves Italy’s lenders at the mercy of a confidence crisis.

Andrew Roberts from RBS said the world has become “a dangerous place” as Fed tightening marks an inflexion point in global liquidity.

Borrowing costs of 5pc could prove crippling for Spain and Italy, both suffering from contraction of nominal GDP.

Mediobanca said the trigger for a blow-up in Italy could be a bail-out crisis for Slovenia or an ugly turn of events in Argentina, which has close links to Italian business. “Argentina in particular worries us, as a new default seems likely.”

Mr Guglielmi said Italy’s industrial output has slumped 25pc from its peak in the past decade, while disposable income has dropped 9pc and house sales have dropped to 1985 levels.

The 1992 crisis was defused by a large devaluation, allowing Italy to restore trade competitiveness at a stroke. Mediobanca said: “The euro straitjacket is clearly not providing a similar currency flexibility today. With the lira devaluation Italy managed to inflate debt away, which it cannot do today. It could take more than 10 years to revert to pre-crisis output levels.

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