While eyes are firmly fixed on Greek bailout round II, the dispute over the Portuguese bailout, and the lingering threat of Spain, markets have decided the situation in Italy does not merit any sort of pressure.That peaceful situation may not last forever, however, according to Societe Generale’s Vladimir Pillonca.
At the other end of the spectrum, Italy has almost completely strayed from front-loaded fiscal adjustment and painful reforms. So far markets have not punished Italy’s fiscal inaction, and Italian bonds have performed remarkably well in recent weeks, despite recalcitrant growth (barely 0.1 % qoq in Q4). The question remains whether market pressures might force Italy towards further austerity measures later this year, especially if sovereign tensions remain high, and Italy’s economy continues to underperform the rest of the euro area. For now, fiscal action is not being contemplated until 2012-2013, although it remains doubtful whether even this date will prove realistic. Not least because the current government coalition may not manage to last until the next elections, due in 2013.
Everyone talks about Spain acting as a wall between the eurozone’s indebted fringe and its interior. But Italy is part of that wall too, and once markets are comforted about the future of Greece (likely another bailout) and Portugal (likely a bailout that the Finns agree too), its weak growth and lack of austerity may seem a much more interesting target.
At the least, markets may insist Italy go through another round of austerity before their leaders want to. The last round of austerity measures didn’t go over very well.
Note, the market pretty much doesn’t even consider Italy a member of the PIIGS anymore in terms of its spread vs. the Bund, but it’s still trading closely with Spain.
Photo: Societe Generale