According to Italy’s second largest bank, Mediobanca, the country is likely to need an EU rescue within six months as the embattled country continues to slide deeper into recession and as a credit crunch spreads to large companies.
“Time is running out fast,” said Mediobanca’s top analyst, Antonio Guglielmi, in a confidential note. ‘The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now is special crisis administration.”
The Bank added that its index of solvency risk for the country is already flashing up danger signs as the global bond rout continues into a second week.
Borrowing costs for Italy and other troubled nation’s such as Spain and Greece have all seen their costs rise, with some reaching beyond the level last seen during the height of the Euro crisis, a crisis that could return in full force and more dangerous than ever if Italy does indeed request an EU rescue.
The Bank warns that Italy will ‘inevitably end up in an EU-bail out request’ over the next six months unless it can count on a broad recovery and lower borrowing costs. So far only feint signs of a possible recovery have been seen. Worryingly it seems unlikely that there will be any strong European recovery in the near future as unemployment continues to rise.
Emphasising the gravity of the situation, it compared the crisis to when the country was blown out of the Exchange Rate Mechanism in 1992 despite drastic austerity measures.
‘‘The European Central Bank needs to take very aggressive steps to offset this,’’ said Marchel Alexandrovich from Jefferies Fixed Income. ‘‘We have a sell-off across the board. If the ECB doesn’t act, it could see all the gains of the last nine months vanish in two weeks, taking the Eurozone back to square one.’’
The ECB is unlikely to ‘act’ however after the Bank backed away from steering credit to small businesses in the region and its ‘do whatever it takes to save the Euro’ policies remain under scrutiny in Germany. The northern Eurobloc nations are increasingly reluctant to bail out the struggling southern countries and if Italy does require a bailout it will need sums of cash that far outweigh any of the bailouts given so far.
Mediobanca is warning that the trigger for disaster in Italy could be a bail-out crisis for Slovenia, which continues to cause concern, 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.’’
The bank goes on to blame the Euro for not helping the situation.
“The Euro straitjacket is clearly not providing 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.’’
Since the crisis began Italy has seen its industrial output plummet by 25% from its peak, disposable income has fallen by 9%, house prices have declined to pre 1985 levels and unemployment has surpassed a 36-year high of 12%.
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