In Rome, bailout is no longer taboo

Despite reassuring announcements from the government, Italy’s Treasury is already peering closely at the terms of an assistance plan. Its goal: to find a painless solution that will prevent the third-largest economy in the eurozone from getting the Greek treatment.

Published on 15 June 2012 at 15:37

Après Spain, le Italy. This is the idea that has taken hold in the financial markets, and not just there. “We have come up with three different scenarios, including a possible rescheduling of outstanding public debt”, a source in the Italian Treasury, who requested anonymity, has revealed to Linkiesta. The goal is to “be ready for anything, even the worst-case scenario.” That includes the arrival on the scene of the Troika (the International Monetary Fund, European Central Bank, and the European Commission) which would both monitor public accounts and intervene through funding. “There are still no precise figures, but it is certainly more than what was spent on Greece, Ireland and Portugal put together,” the official confirms. In other words, more than 350 billion euros.

“Italy has not asked for help. But if it did, Europe would be ready.” That recent declaration from Maria Fekter, Austria’s Minister of Finance, has rekindled the controversy over the next victim of the European crisis. Comments by Fitch ratings agency head Edward Parker, who highlighted the differences between Italy and the Iberian Peninsula in terms of financial risks – “Italy is unlikely to need a bailout” – were of little help.

The Treasury has outlined three scenarios, our source revealed. The first, and the most optimistic, gives Italy a glimmer of hope: an European banking union, a Community Fund guarantee on bank deposits, Eurobonds and, subsequently, full fiscal union. These are the steps that could calm the situation in the eurozone. If everything were to play out according to this scenario, Italy could yet save itself. The obstacles, though, are many. A possible Greek exit from the eurozone, a deepening of the Spanish crisis and a further downgrade to Italy’s credit rating are not considered in this scenario, which relies on a static vision of the situation as it was back in late April. That is, when yields on Italian ten-year bonds were around 5.5 percent – since then, they have gone past six percent.

The most interesting scenario is the second: “If at the end of September the yield on ten-year bonds is still near six percent or greater, Italy’s refinancing difficulties – already grave – could become insurmountable,” says the Treasury official. If this were to happen the Troika would be paying a visit to Italy, just as it has already stopped in on Greece, Ireland and Portugal. At the same time, financial assistance would begin to come in to meet the basic needs of the country, whose access to bond markets would be reduced – if it still had any access at all. That means that, as a basic framework, roughly 770 billion euros would have to be made available to Italy to cover the necessary funding in the country’s 2013 to 2016 budget.

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Nobody wants to hear about the Greek solution

However, one doubt remains. Will Italy need to restructure its debt, which has reached almost two trillion euros? The answer is given by the most extreme scenario, the third. It foresees, among other things, a Greek exit from the eurozone, potentially driving up interest rates on Italian ten-year bonds to above 11 or even 12 percent. In that event, a restructuring of the Italian debt would become possible. If this were to come about, however, the Treasury’s working hypothesis foresees a postponement of the deadlines for repaying the bonds rather than an invasive and disorderly intervention like that seen in Greece in March and April just past.

As in Spain, nobody wants to hear about the Greek solution. All differences considered, however, this is precisely what it is being discussed with the IMF. For the time being the action plan does not anticipate a request for support. “Right now, that would be fatal to us. The EU summit in late June will be a very significant date for figuring out where Europe is headed,” says our source. And, as expected, there is no precise figure for the scale of any intervention. “As everyone knows, Italy is too big to be saved and too big to fail. But we also know that every effort should be made to avoid the worst,” one analyst in the Fixed Income department at Credit Suisse told us.

The means for staunching a possible Italian haemorrhage come half from Europe, half from abroad. On one side we have the European Financial Stability Fund (EFSF), the European Financial Stabilisation Mechanism (EFSM), and the European Stability Mechanism (ESM), which together could come up with just under 700 billion euros. On the other side we have the IMF, which has stated its readiness to boost its own contribution to be earmarked for the European crisis to about 335 billion euros. That brings the total to around a trillion euros.

Financial support to Italy could be multilateral and structured at various levels. It will largely depend on the actions that Europe will manage to get underway in the next three weeks. Politically and economically, these decisions could be a knock-out blow on financial investors, with unknown side-effects. As noted by the Treasury official, “If we continue down this path, the question is not ‘Will Italy be bailed out?’ but ‘When’?”

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