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  • Unprecedented moves taking place on Italian bond markets today.
  • Italy has sizable amounts of bonds maturing in over the coming year.
  • Market pressure increasing.

Jan von Gerich,  an analyst  at Nordea Research, has explained that  a loss of market access would force Italy to ask for outside help or start printing its own currency.

Key Quotes:

“Both would be very problematic scenarios. In any case, Euro-area break-up fears would balloon and markets would go into a crisis mode.”

“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.”

“Even if the net financing needs of the Italian government are limited, large amounts of bonds mature almost every month, so there is the need to roll over maturing debt. This can be done only as long as there is appetite in the financial markets to buy Italian debt. Italy is shielded to some extent by a strong domestic investor base, including retail investors, but there are limits to how much more debt the domestic investors can buy, especially in the short term.”

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.”