Stringer/Italy/Reuters - A man walks past Milan Stock Exchange July 12, 2011. The main measure of Italy's borrowing cost broke above 6 percent for the first time in 14 years before easing back on Tuesday as the euro zone's third-largest economy was sucked into the bloc's debt crisis.
Though a limited default could be largely technical in nature — limited to a cluster of European banks that agree to take measured losses or assume the risk of lending to Greece at below-market values in order to help it out of its hole — economists warn even that could turn the embers of investor panic in nations like Italy into flames.
Sensing the danger, European leaders were scrambling to arrange an emergency financial summit to address the crisis, perhaps as soon as Friday.
“What you are seeing is a deterioration of market confidence,” said Thomas Mayer, chief economist with Deutsche Bank in Frankfurt. “Italy is the 850-pound gorilla in the room. The Europeans need to be careful now. It is too big to be saved by the rest of Europe. It is a weight they cannot lift.”
Fears that Italy could be caught up in the crisis have raged for months, but the first significant signs Rome was catching Athens’s malady emerged last week, when investors began dumping Italian bonds and selling off the stocks of banks like UniCredit that are heavily exposed to Italian debt as well as the debt of other troubled European nations.
That accelerated Monday, three days after Berlusconi fueled concerns of Rome’s commitment to passage of $56 billion in budget cuts by making disparaging remarks about his own finance minister, Giulio Tremonti. The cuts also have come under fire from analysts for backloading the worst of the belt-tightening until after the 2013 Italian elections.
Berlusconi — plagued by sex and financial scandals — sought to ease those fears Tuesday, saying the “crisis prompts us to speed up” approval of the budget-cut package and “to bolster its content and draw up additional measures aimed at balancing the budget by 2014.”
Yet Italy, analysts note, is no Greece. Though plagued with slow growth and a massive debt load, Italy is not nearly as profligate, running a relatively modest budget deficit of 4.2 percent of its gross domestic product. Italy also is an industrial powerhouse, home to Fiat and other major manufacturers of automobiles and heavy equipment.
Still, analysts say that saving Italy would not be as simple as a Greek-style bailout, given that Rome needs to refinance a whopping $1.2 trillion in debt by the end of 2015 — dwarfing the pot of cash Europeans, the International Monetary Fund and the European Central Bank have set aside to contain Europe’s debt crisis thus far. If Italy’s situation markedly worsens, analysts say the ECB might need to begin acting like the U.S. Federal Reserve after the U.S. financial crisis — effectively printing money to buy up vast amounts of Italian and other troubled European bonds.
“I think Italy is in a much better position than Greece still, but clearly the Europeans now need to make sure that Italy doesn’t go,” said Jonathan Tepper, partner at Variant Perception, the London-based research firm. “That would be bad, and not just for the Europeans.”
Schneider reported from Washington.
Loading...
Comments