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Wednesday 20 August 2014

Italy heading for EU rescue 'within six months' as crisis deepens

Ambrose Evans-Pritchard

Published 25/06/2013 | 04:00

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ITALY is likely to need an EU rescue within six months as the country slides into deeper economic crisis and a credit crunch spreads to large companies, a top Italian bank has warned privately.

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Mediobanca, Italy's second-biggest bank, said its "index of solvency risk" for Italy was already flashing warning signs as the worldwide bond rout continued into a second week, pushing up borrowing costs.

"Time is running out fast," said Mediobanca's top analyst, Antonio Guglielmi, in a confidential client note.

"The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now in special crisis administration."

The report warned that Italy will "inevitably end up in an EU bailout request" over the next six months, unless it can count on low borrowing costs and a broader recovery.

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.

Italy's €2.1 trillion debt is the world's third-largest after the US and Japan. Any serious stress in its debt markets threatens to reignite the eurozone crisis. This may already have begun after the US Federal Reserve signalled last week that it will begin to drain dollar liquidity from the global system.

Italian 10-year yields spiked to 4.8pc, up 100 basis points since the Fed began to toughen its language in May. But Mediobanca is particularly concerned about the gap that has emerged between yields on short-term bills (BOTs) and longer-term bonds (BTPs) near maturity that expire at the same time.

BOTs retiring on July 31 are trading at a yield of 0.48pc, while the equivalent BTP is trading at 0.74pc. The reason is that BOTs are protected from debt restructuring.

"The bills never get a haircut, so people are fleeing bonds instead as positions gets squeezed," said one City trader.

Sovereign debt strategist Nicolas Spiro said "taper terror" is jolting eurozone investors out of their complacency, though safe-haven Swiss and German bonds have also sold off sharply in the rout. (© Daily Telegraph, London)

Irish Independent

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