The ECB's working assumption has always been that preventing the spread of contagion to Spain was of paramount importance. While it's true that Italy has most always been included when discussing the PIIGS debt problem, there was a sense that because Italian debt is largely held domestically by Italians (like Japan's situation, although not as high as their 95% domestic holding level) that the risks of unstable debt dynamics there were relatively low.
All that apparently changed suddenly on Friday as Italian bond spreads widened and, perhaps even more troubling, key Italian bank stocks plunged. As Italian regulators race to curb short selling, today both Italy's largest bank, UniCredit, and Intesa Sanpaolo are limit down, which triggered a halt to trading in their shares.
Has the ECB in its successful efforts to prevent financial contagion from spreading to Spain left Italy vulnerable to speculative attack? Or is Italy's rolling-over merely a sign of the realization on the part of government officials that they simply can't go on playing the kick-the-can down the road game indefinitely? Treasury Secretary Geither seemed to concede as much during a Sunday morning interview on Meet the Press.
For how bad things could get if Italy implodes (the country is home of the world's third largest bond market after the U.S.'s and Japan's) the below chart provides some perspective.
Update: There are reports that today (Tuesday) the Italian central bank, acting perhaps on the behalf of the ECB, has been buying Italian debt, and that the ECB will need to step in again for Italy's debt auction on Thursday or it will fail.
Every time European central banks step in to purchase sovereign debt the value of the euro will ratchet down accordingly.
Indeed among the people here no one is worried about this. We still use to safe before purchasing something, hence few credit cards and few mortgages. The low private debt and high saving rates made things easier for the people and when someone loses his job can have more aid among relatives. Family matters. Eventually, before entering the EU, the government made a haircut on all banks accounts. In these days an authoritative newspaper calculated that with another haircut we could cut our public debt by 20 % at once. Personally I'm waiting bargains on the stock markets and even bonds. I guess speculators betting against Italy are waiting the same thing.
ReplyDeleteCiao.