Why Italy is the new Greece

By Alex Brummer for the Daily Mail
Updated: 08:20 EST, 7 November 2011

No sooner had the political logjam in Greece been eased, with the emergence of a unity government, that market attention has switched to Italy.

While the world has been focusing on the euro periphery it is Italy which has always been the elephant in the room. As the third largest economy in the eurozone neither the European bail-out fund or the recapitalisation plans for the region’s banks are adequate if Italian default became necessary.

Hence the hurried efforts at last week’s G20 to put in place an International Monetary Fund safety net.

Elephant in the room: While the world has been focusing on the euro periphery it is Italy which has been overlooked

Elephant in the room: While the world has been focusing on the euro periphery it is Italy which has been overlooked

Just how critical the situation in Italy has become was evident at the opening of Europe’s financial markets. The yield on benchmark Italian 10 year bonds jumped a 0.33 percentage point to 6.58 per cent, the highest level since the euro was established in 1999.

More serious than that with borrowing costs at this level Italy will find it all but impossible to cover the interest payments on its gross debt which stands at 121 per cent of gross domestic product.

In the past Italy has been able to weather the storm because of the willingness of Italian banks and the broader population to hold Italian bonds. But although the current yields may look superficially attractive they represent a signal that the country potentially could default on its debt.

These fears affected equity markets across Europe with the FTSE100 sharply down in volatile trading.

Charm: Madame Lagarde is too close to her European colleagues and too political to be taken very seriously

Charm: Madame Lagarde is too close to her European colleagues and too political to be taken very seriously

The pressure will not be on in Italy for Greek style political solution, some kind of government of national unity, which can deliver the economic reforms. No one believes that Italy’s clown-in-chief Silvio Berlusconi is capable of implementing the reforms discussed at the G20. He seems to think that he can bluff his way through quarterly IMF inspections.

But with the eurozone apparently powerless to impose conditions on Greece it is going to be the IMF which will have to show the steel. Indications are that the new deputy managing director the American David Lipton, is the best person to wield the knife.

For all her charm Madame Lagarde, the managing director, is too close to her European colleagues and too political to be taken very seriously by Angela Merkel or President Sarkozy. And as the Americans are by far the biggest shareholders in the IMF and can probably carry the Japanese and other big shareholders with them it is they who will dictate the terms as they did in 1976 when Britain borrowed from the IMF.

Once again the G20 and Europe have failed to deliver and the market uncertainty moves the whole world back to the brink of recession even of the Asian economies seek to pick up some of the slack.


Read Alex Brummer's RightMinds blog here

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