Italian Debt Crisis Rattles Europe’s Third Biggest Economy

Italian Prime Minister Silvio Berlusconi said he would speed the passage of a 40 billion-Euro ($56 billion) deficit-cutting plan to stop a market selloff that threatens Europe’s single currency.  The “crisis prompts us to speed up” approval of the budget cuts, Berlusconi said since Italian stocks lost nearly 7.5 percent over two sessions and bond yields soared to the highest in 10 years.  Referring to the austerity plan, Berlusconi vowed “to bolster its content and draw up additional measures aimed at balancing the budget by 2014.  The crisis in confidence that has battered financial markets and hit Italy in recent days is a threat for everyone in the Eurozone, the most concrete element of European unity,” Berlusconi said.  He noted that Italy’s banks are “solid” and his government and opposition parties are determined to defend Europe’s third largest economy.  Italy has the world’s 7th largest economy and the Eurozone’s third largest.

The initial signs that Italy was in trouble emerged last week, when investors began dumping Italian bonds and selling off the stocks of banks such as UniCredit that are heavily exposed to Italian debt.  That accelerated  three days after Berlusconi drove worries about Rome’s commitment to the passage of the proposed budget cuts by snarking about finance minister Giulio Tremonti.  ”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, a London research firm.  ”That would be bad, and not just for the Europeans.”

Berlusconi said that the plunge in the country’s stocks and bonds in recent days is a threat for the unity of Europe and the Eurozone.  “The crisis in confidence that has battered financial markets and hit Italy in recent days is a threat for everyone and that effects the single currency, the most concrete element of European unity,” he said, noting that his government and opposition parties are determined to defend Italy and that he is supported by his European Union allies.

“Berlusconi and Co. must back down and give (Finance Minister Giulio) Tremonti full support immediately,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London.  Of all Eurozone nations that are sensitive “to rising debt servicing costs, Italy tops the list, so it can’t afford for this colossal rise in long-term rates to be anything other than very short-term.”

Roben Farzad of Bloomberg Business Week said on National Public Radio’s “All Things Considered”,  “Profligacy.  Look, I mean, the Euro was great.  The Eurozone was great when it all worked out and had this single currency and you can partake in cheaper labor and people going across the borders easily and lower cost of capital for everyone.  But when times are bad, i.e., this great global recession of ours, suddenly you have a dynamic where the haves and the have-nots are exposed for what they are.  And the smaller countries, the more peripheral countries, turns out that they really borrowed beyond their means.  But Italy is the perennial sick man of Europe.  It’s a slow growing economy.  It’s not monolithic.  The south tends to be poor.  The north is wealthier and more industrious and has the majority of the finance and the capital and whatnot.  The problem is, when times are good and risk is perceived as being overrated, you have the international debt capital markets being very easy with loaning money to countries.  And slow-growing countries like Italy and Japan, if you look at their last 20 years, they tend to over-borrow in order to make ends meet.  Believe it or not, Italy is the third most leveraged country in the planet.”

James Walston offers this analysis in the Telegraph.  According to Walston,  “For those of us not versed in the dark arts of accounting or international finance, there is little more solid than money; I have it or I don’t, I can borrow it or lend it and measure it down to the last penny.  But confidence is an altogether different commodity, far more abstract and difficult to gauge.  Italy is trying to persuade us that the world should have confidence in both its political and its financial stability.  It will not be easy.  The ratings agencies’ evaluation of a country’s creditworthiness are one measure of stability; another is investor confidence in the bond markets about Italy’s solvency.  On both scores, the omens are getting worse for Italy day by day.  Until recently, Italy had avoided the worst of the world and European crises.  There was no housing bubble, as Italian banks demand copper-bottomed collateral before they will lend the ordinary house buyer a cent.  There were almost no toxic assets, as banks are amazingly conservative in their investment policies.”

European Central Bank Governing Council member Mario Draghi urged the Italian government to move ahead with further measures to re-balance the budget by 2014.  “The substance of future measures aimed at balancing the budget by 2014 should be defined as rapidly as possible,” he said.  “This is what markets are looking at above all today.”  Additionally, Draghi criticized the European policy response to Italy’s debt crisis, saying policymakers must “bring certainty to the process by which sovereign debt crises are managed” with clearly defined objectives and instruments.  International Monetary Fund economists have urged “decisive implementation” by Italy to cut its enormous public debt, pointing out that its austerity plan is based on buoyant forecasts with measures weighted toward the future.