Europe’s third largest economy has some advantages over Spain, but if bazookas and firewalls or even a Spanish departure could leave the euro-zone intact, troubles in Italy could deal a deadly blow to the euro-zone.
Italy has a much lower ratio of private debt in comparison with its GDP. The unemployment rate is high, but at sane 9.3%. Italian 10 year bond yields managed to break below Spain’s yields, after quite some time of things being the other way around.
Monti’s Partial Success
Nevertheless, the market is expecting Italy to perform its own labor reforms, and they aren’t moving too fast, to say the least. Italy’s technocratic PM, Mario Monti, doesn’t have too much political backing in Italy. Even if he manages to pass reforms that will calm the markets, these can be easily reversed when he steps down in 2013.
2013 sounds far, but the temporary notion of his term has strong ground in Italy and his political power is limited.
Monti, formerly with Goldman Sachs, is certainly good at public relations. He sounds very determined in his speeches, and his bashing of Spain seems to be well heard in the markets.
This will keep Italy afloat in the short term. Italy will hold a bond auction on April 26th, and while it will likely pay a high price, full cover is expected. A failed auction will be worrying and will show that the PR effects are fading out.
It isn’t only about yields and market perception: Italian banks are seeing funds leaving them, and the economy is contracting (something that Italy wasn’t so keen to share). Yet again, its troubles aren’t as bad as Spain’s, but the bad economic reality cannot hide behind Spain for a long time.
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