Italy: Cost of Debt Approaches Red Zone


Although this graph lacks sexy Italian styling it gets the job done.

Inquiring minds are watching Italy as their cost of their debt appoaches critical levels. Italy is Europe’s biggest debtor and may slip from the eurozone’s stable core into the high-risk group on the periphery:

The spike in rates came as money supply data released by the European Central Bank showed that real M1 deposits have collapsed at a rate of 2.8pc over the last six months in the EMU bloc of Italy, Spain, Greece, Ireland and Portugal, even though they are rising in northern Europe.

“This is comparable with the decline in early 2008 just ahead of the plunge into recession,” said Simon Ward from Henderson Global Investors. “The eurozone periphery is locked into a ‘double dip’ that will undermine fiscal consolidation.”

The fiscal instability is ripping apart any hopes of European unity:

The poor auction in Rome may be a warning sign that EU leaders offered too little to restore confidence at their Brussels summit two weeks ago.

German Chancellor Angela Merkel vetoed the creation of eurobonds or any serious move towards fiscal union, and shot down calls for an increase in the eurozone’s €440bn emergency loan fund. The ECB has so far refused to step in to the breach with overwhelming action.

Willem Buiter, Citigroup’s chief economist, said the response had been “woefully inadequate”, raising the risk of fresh bank failures and a wave of sovereign defaults next year. He said the EU authorities may need a mix of measures worth up to €2 trillion to stop the rot.

And the outlook does not look very promising either:

Italy’s M1 contraction began later than elsewhere in southern Europe but is now accelerating. M1 typically gives advance warning of economic shifts by six to nine months.

Mr Ward said signs of recovery in the ECB’s broader M3 money data is less reassuring than it looks since the gauge was temporarily boosted by flight to liquid assets on EMU debt worries.

The dominoes continue to fall across Europe.

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