A Hard Look at Italy

By:  Bob Adelmann
11/10/2011
       
A Hard Look at Italy

With yields on Italy’s 10-year government debt rising sharply higher and beyond the seven-percent ceiling deemed unsustainable, Italy is running out of options in finding buyers for its debt. It is also running out of options as a sovereign nation.  Jan Randolph, head of sovereign debt risk at IHS Global Insight, said, “Italy will not be out of the heat of bond markets until a solid and stable government actually implements austerity and undertakes reforms with strong credible leadership.” That may be asking the impossible.

 

With yields on Italy’s 10-year government debt rising sharply higher and beyond the seven-percent ceiling deemed unsustainable, Italy is running out of options in finding buyers for its debt. It is also running out of options as a sovereign nation.

Jan Randolph, head of sovereign debt risk at IHS Global Insight, said, “Italy will not be out of the heat of bond markets until a solid and stable government actually implements austerity and undertakes reforms with strong credible leadership.” That may be asking the impossible.

When Prime Minister Silvio Berlusconi took office in 1994, his government was the country’s 62nd in 64 years. His personal popularity was sufficient to quell concerns about corruption, personal sex scandals, and lack of any plan or intention to install measures that would have begun to rein in Italy’s spending habits. It was easier to give way to the labor unions, controlling 40 percent of the labor force, and offer additional spending programs to buy the votes to keep him in power. Now that Berlusconi has agreed to step down, it is unclear who the new PM might be, much less whether he will provide Randolph’s “strong credible leadership” needed to implement reforms and limit government spending.

Barclays Bank agrees with this assessment, as noted in a recent client newsletter: “We believe that policy reforms in Italy are necessary. However, historical experience suggests that the self-reinforcing negative market dynamics that now threaten Italy are very difficult to break. At this point, Italy may be beyond the point of no return.”

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