Societe Generale’s Albert Edwards says Italy should not have been sucked into the vortex. Unlike the PIGS, Italy never had a irresponsible boom. Instead it has been sucking wind and piling up debt for more than a decade.
Now that the market has turned on Italy, he says it could also turn on France and Germany, which have relatively bigger off-balance-sheet liabilities.
Edwards is bullish on Europe only because he says the ECB will be forced to monetise European debt.
The increasingly frenzied attempts of eurozone governments to persuade financial markets that they can draw a line under this crisis will ultimately fail – even if this week’s measures bring some short-term relief. I have minimal confidence that governments can turn this around within the confines of the eurozone project. You might be surprised though that I feel more bullish! Why? Both Dylan and I have come to the view that the ECB will be forced, by events, to monetise debt in the GIIPS and beyond. And if investors believe the governments in Spain and Italy are bust, then Germany, France, and not forgetting the UK and US, are far, far worse.
Italy never ‘enjoyed’ a boom to suffer any bust. And on many measures, including reputable attempts to take account of off-balance sheet liabilities, Italian public sector debt fares well on cross-country comparisons (see chart below). These off-balance-sheet liabilities will now increasingly become visible to all. Who then will be really bust?