Italy Is Too Big To Bail, Even For France And Germany

Jul. 12 2011 - 12:10 pm | 6,696 views | 1 recommendation | Image by AFP/Getty Images via @daylife

With Italy in the eye of the storm of the EU debt crisis amid rumors that the European Central Bank has intervened by buying Italian sovereign bonds on the secondary market, analysts are coming to the conclusion that Italy is ‘too big to bail’ given its massive funding requirements and total debt outstanding of €1.6 trillion ($2.2 trillion).

Italian equities managed to record some gains during Tuesday’s session, up 1.3% after a terrible two-day beat-down that led to some of the largest spread moves in sovereign bonds in the European monetary union’s history.  Yields on benchmark 10-year Italian bonds fell marginally on Tuesday and stood at 5.66%, just below Spain’s 5.96%.

With a plethora of negative news coming out of Europe on a daily basis, it is hard to attribute this Italian crisis to one event, but what is undeniable is that markets are coming to the realization that Italy is a whole different animal from Greece, Ireland, and Portugal, and that bailing it out might deliver a final blow to the beleaguered European Union. (Read Euro Contagion: Italian Equities Tank, Yields And CDS Jump).

Differences are staggering.  While funding requirements for 2012 for the three PIIGs that have already been bailed out total €91 billion ($127 billion), Italy’s funding requirements reach a massive €250 billion ($350 billion).  Total outstanding debt for the country run by Prime Minister Silvio Berlusconi is around €1.6 trillion ($2.2 trillion), compared with €345 million for Greece, and about €150 billion each for Portugal and Ireland, according to analysts at Nomura.

If Italy were to fail, the problem would be that it is too big to bail.  Nomura points out that current European Financial Stabilization Facility (EFSF) mechanisms were designed to deal with the failure of relatively small countries being bailed out by a relatively large group of participating Eurozone countries.  The equation changes for Italy.

Currently, the EFSF has an effective lending capacity of €320 billion ($448 billion) out of a total of €440 billion ($616 billion); Italy’s funding needs over the next two years exceed €500 billion ($770 billion).  Not only would the EFSF (and its successor, the European Stability Mechanism-ESM-with total authorized capital estimated to be around €700 billion) lack the capacity to bail out Italy, the number of countries ready and willing to lend Rome a hand would be reduced to only two: France and Germany. (Read French Banks Hold $93B In Greek Debt As Sarkozy Announces Rollover Deal).

If Europe’s two big dogs were forced to cough up €500 billion for their Italian buddies, that would constitute approximately 10% of their combined GDP (around €5 trillion, according to Nomura).  According to the note:

At some point the load will be too big for France and Germany too. For example, would France be able to sustain an AAA rating with contingent liabilities to Italy in excess of 10% of GDP?

There is not enough capacity to bail out Italy within the current bail-out infrastructure. And even an expanded EFSF may not be able to provide a credible backstop over the medium-term

One possible alternative is central bank intervention to lower rates. Traders on Tuesday were pretty sure they saw the hand of the ECB, through the Bank of Italy, in sovereign bond markets for Italian debt in  a day when they auctioned off €6.75 billion of Italian debt at a much higher rate than usual. And on Monday, a meeting of European Finance Ministers allowed for the possibility that the EFSF could be allowed to buy sovereigns in the secondary market. (Read Europe’s Debt Grind, Worry Over Italy Keep Traders Jumpy).

But this might not be enough, as FT Alphaville notes.  While the ECB has already tried these interventions with Greece, Portugal, and Ireland, it has not succeeded in ensuring “depth and liquidity in those market segments which are dysfunctional,” as trade volumes in those suggest.  And, given the size of the Italian bond market, with “daily turnover in May of €12 billion” and gross issuance in the third quarter of €31 billion in two, five, and ten-year bonds, it would be a disaster for the ECB to make Italy “a regular patient.”

The situation is dire indeed.  The political battle in Germany over bailing out smaller nations was massive, eroding much of Chancellor Angela Merkel’s political capital.  Bailing out Italy, then, seems like an economic, political, and social impossibility.

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Italy is too big to bail, also for France and Germany

Jul 12 2011-12: 10 pm | 6.696 Views | 1 Recommendation |  Image by AFP/Getty Images via @ Daylife

Italy in the eye of the storm from the EU debt crisis are in the midst of rumors that the European Central Bank intervened by purchasing of Italian Government bonds on the secondary market, analysts at the end come with that Italy is too large to save due to the massive financing requirements and the total debt outstanding of € 1.6 trillion ($2.2 trillion).

Italian stocks managed some gains while the Tuesday meeting record, by 1.3% after a terrible two-day beat, which led to some off the largest spread in government bonds in the European Monetary Union move history.  Returns of benchmark ten-year Italian bonds fell slightly on Tuesday and was 5.66% just below Spain 5.96%.

With a variety of negative news from Europe on a daily basis it is difficult, Italian crisis attribute to an event of this, but what is undeniable, that markets come to the realization that Italy is a completely different animal from Greece, Ireland and Portugal, and bailing out a death blow for the beleaguered European Union could deliver d.. (Read euro contagion: Italian shares tank, income, and CDS jump).

Differences are staggering.  During Italy is minimum funding requirements for 2012 for the three PIIGs, which have already been saved from a total of 91 billion € ($ 127 billion) financing requirements range one massive 250 billion € ($ 350 billion).  Approximately 1.6 trillion € ($2.2 trillion) compared with EUR 345 million for Greece and about 150 billion euro is each for Portugal and Ireland a total outstanding debt for the country, run by Prime Minister Silvio Berlusconi, according to analysts at Nomura.

If Italy fail, the problem would be that it is too big to bail.  Nomura pointed out that the current European financial stabilisation facility (EFSF) mechanisms have been developed, to deal saved by a relatively large group of the countries participating in the euro area is with the failure of the relatively small States.  The equation changes to Italy.

Currently, the EFSF has an effective lending capacity of 320 billion euros ($448 billion) of total 440 billion € ($616 billion); Italy's financing must exceed € 500 billion ($ 770 billion) over the next two years.  Not only would the EFSF (and its successor, the European stability mechanism-ESM-with a total approved capital around 700 billion €) lacks the capacity to save Italy, reduced the number of countries that are ready and willing would lend a hand to Rome to only two: France and Germany. (Banks hold read French $93b in Greek debt, as Sarkozy rollover deal Announces).

If Europe's two big dogs to cough up $ 500 billion for their Italian friends were forced to around would represent 10% of all their combined GDP (around 5 billion euros, according to Nomura).  According to the note:

At some point, the burden on France and Germany will be too large. For example, would France can Italy to receive AAA rating with contingent liabilities over 10% of GDP?

There is not enough capacity to the rescue of Italy within the current Bail-Out infrastructure. And even an extended EFSF may not be in the location, a credible backstop of medium-term to make

A possible alternative is Central Bank intervention to lower prices. Traders Tuesday were pretty sure that they saw the hand of the ECB by the Bank of Italy, sovereign bond markets for Italian debt on a day when she auctioned off 6.75 € the Italian debt to a much higher than usual. And on Monday, a meeting of European Finance Ministers the opportunity that could be allowed the EFSF to buy ruler in the secondary market. (Read grind Europe debt, worry about Italy keep traders nervous).

But this may be not enough, as FT Alphaville notes.  While the ECB already, this intervention has tried with Greece, Portugal and Ireland, not succeeded in providing "Depth and liquidity in these market segments are the dysfunktionalen", as volumes in that trade.  And given the size of Italian bond, with "Daily turnover in may from 12 billion euros" and gross output in the third quarter of EUR 31 billion in two, five and ten years bonds, it would be a disaster for the ECB to Italy "a regular patients."

In fact, the situation is dire.  The political battle in Germany about bailing out smaller Nations was massive, much of Chancellor Angela Merkel political capital to erosion.  Rescue operations for Italy, it seems then, as the impossibility of economic, political and social.

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