Spain just announced a 100bn euro bailout from the EU on Saturday. Now everyone is wondering if and when Italy will need to come to the table for assistance and what sort of precedent this weekend’s news has set.”As we expect a further escalation of the crisis, we believe Italy will probably need outside help at some point,” writes Citi’s Jürgen Michels and his team of European economists.
From a recent note to clients:
Such weak growth prospects mean that in our view, Italy remains susceptible to large and sudden rises in yields and that in the event of an aggravation in market tension as a result of the problems in Spain and Greece, Italy too will most likely require some form of intervention from the ECB (which supported Italy already twice), the EFSF/ ESM and the IMF at some point.
The Citi economists outline a few reasons for their call.
- Citi’s view is that fundamentally, Italy is just not in good shape. They write, “we believe that Italy will experience a deep recession and that its long-term growth prospects will remain weak for an extended period.”
- The deep recession call assumes an Italian government that won’t be able to hit its deficit targets, causing debt-to-GDP in Italy to rise even more than it already would anyways. Citi thinks “Italy’s very large and persistent stock of public debt is likely to increase further, reaching 137% of GDP by 2014 compared to 120.6% in 2011 and expected 129.3% in 2012.”
- Italian banks aren’t in the best shape either. Although they weren’t wrapped up in the same sort of real-estate boom that got the Spanish banking system in trouble, Citi says there are still concerns about solvency in the Italian banking system given the “relatively poor quality of the domestic loan book, large exposure to other Italian banks and the government and the lack of a large buffer of ‘excess’ capital.”
Clearly, Europe’s debt crisis is far from over.