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Italy too may need bailout

Raising the stakes in Europe’s debt crisis, Austria’s finance minister said Italy may need a financial rescue because of its high borrowing costs, drawing a furious rebuke on Tuesday from the Italian prime minister.

Maria Fekter’s assessment of the euro zone’s third largest economy amplified investors’ fears that Europe is far from ending 2-1/2 years of turmoil.

A deal by euro zone finance ministers on Saturday to lend Spain up to 100 billion euros ($125 billion) to recapitalise its banks was seen by many in the markets as yet another sticking plaster.

Euro zone rescue funds, already stretched by supporting Greece, Portugal, Ireland and soon Spain, might be insufficient to cope with Italy as well, Fekter said in a television interview on Monday night.

“Italy has to work its way out of its economic dilemma of very high deficits and debt, but of course it may be that, given the high rates Italy pays to refinance on markets, they too will need support,” Fekter said.

She sought to soften her remarks on Tuesday, saying she had no indication Italy planned to apply for aid.

Italian Prime Minister Mario Monti said her remarks were “completely inappropriate” for an EU finance minister, and euro zone officials said they were deeply unhelpful.

Amid the cacophony, Italian and Spanish government 10-year bond yields rose further above 6 percent as the aid deal for Spanish banks failed to ease fears about Madrid’s ability to fund itself.

The market reaction suggests that ministers have failed to break the so-called doom loop between rising government debt, economic recession and teetering banks that previously drove Greece, Ireland and Portugal into EU/IMF bailouts.

Analysts cited uncertainty about the mechanics of the Spanish rescue and fears that private bondholders could be pushed down the repayment chain below official lenders, risking losses in any debt write-down, as they suffered in Greece.

“Is this the next stage of a slippery slope in subordinating existing government bondholders?” asked Deutsche Bank strategist Jim Reid in a note to clients.

Investors are also worried about the outcome of a Greek general election next Sunday which may determine whether the country stays in the euro zone.

Credit ratings agency Fitch said the bank rescue may help stabilise Spain’s sovereign rating, which it cut last week by three notches to BBB, and the bailout should not have a direct impact on other euro zone countries.

Even though Italy’s deficit and unemployment are lower than Spain’s and its banks are not exposed to a real estate crisis, doubts about Rome’s ability to turn itself around during a deep recession are keeping international investors at bay.

If the economy does not start to grow after a decade of stagnation, it will face mounting difficulty in bringing down its debt, now at 120 percent of gross domestic product – second only to Greece’s debt mountain in the euro zone.

Bank of Italy Governor Ignazio Visco said last week Italy’s emergency is not over and pressed Monti to speed up reforms.

Reuters [1]

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Dean Popplewell

Dean Popplewell [6]

Vice-President of Market Analysis at MarketPulse [7]
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell
Dean Popplewell

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