ECR: Italy can still be saved, economists believe

The majority of economists surveyed in a poll by Euromoney Country Risk believe that Italy still has time to solve its sovereign debt crisis, despite Italian government bond yields reaching their highest level in more than a decade on Monday (July 11). In a survey of experts covering Italy within Euromoney’s survey of country risk, 85% of economists responded ‘no’ when asked whether Italy had reached the point of no return, after Italian bank shares and bond yields came under fresh attack this week. Nicholas Spiro, of Spiro Sovereign Strategy, says: “This was not an all-out assault on Italy by the debt markets. If it were, it would have happened many months ago. However, only a cigarette paper now separates the market’s views of Italy and Spain.” Prime minister Silvio Berlusconi has appealed for national unity in the face of the crisis and stresses that the government’s €40 billion new austerity package will eliminate Italy’s budget deficit by 2014. Martin Blum, a portfolio manager at Ithuba Capital, says: “The bottom line for Italy is that its debt is currently trading at dangerous levels, but the government’s upcoming fiscal measures should be enough to appease the markets.” Analysts remain concerned by the weak fundamentals in Italy’s economy, particularly its vast government debt, ageing population and low growth outlook. Michalis Vassiladis, of the Foundation for Economic and Industrial Research, says: “In my view, Italy has always been the second-biggest problem state in the eurozone, after Greece. I was surprised that investors targeted Portugal and Ireland before turning their attention to Italy.”

Italian bond yields and shares in Italy’s largest banks recovered in trading yesterday, with UniCredit gaining 1.5% by close. “The longer the crisis goes on, the more likely it becomes that core European countries will be sucked into the crisis,” says Spiro.

A version of this article first appeared in Euromoney Country Risk. Euromoney Country Risk is an online service from Euromoney dedicated to sovereign and country risk.