Italy: Loss of market access would have dire consequences – Nordea Markets

A loss of market access would force Italy to ask for outside help or start printing its own currency and both would be very problematic scenarios as in any case, Euro-area break-up fears would balloon and markets would go into a crisis mode, suggests Jan von Gerich, Analysts at Nordea Markets.

Key Quotes

“Italian assets have been hammered in the past few days. The daily moves in bond yields have actually been larger than at any time during the euro era, including the euro crisis. The rapid loss of market confidence has raised risks that Italy could lose bond market access altogether. While such risks are not close to being realized yet, they are real and it makes sense to consider the vast consequences the loss of market access would have.”

“The only actor with enough fire power to calm the situation is the ECB. It has been buying bonds under its asset purchase programme, and has some inbuilt flexibility in allocating the purchases. However, the monthly purchase volumes have already come down from the highs of EUR 80bn to EUR 30bn.”

“Alternative would be to print new currency

If Italy refused to implement an adjustment programme and was denied ECB help, it would in practice be forced to have a plan B, or starting to print its own currency. The government could simply default on its debt, but its banking system could not survive a government default without ECB support (which would not be given to a country in default without an adjustment programme).”

“Markets could panic big time

The Italian economy is roughly ten times as large compared to Greece. Considering the worries caused by Greece, it is not difficult to imagine the damage Italy could do.

If Italy lost market access – not our baseline scenario – concerns about the break-up of the Euro area would intensify severely. The euro currency would take a beating, Euro-area equity markets would tumble, German bonds would rally strongly and severe pressure would spread from Italian to other Euro-area bond markets. The ECB would have its hands full in trying to fight contagion.

The Euro area could survive an Italian exit only if both the ECB and the governments in the other Euro-area countries were determined to do whatever it takes to save the euro.”