Italy could need EU rescue within six months, warns Mediobanca

Italy is likely to need an EU rescue within six months as the country slides into deeper economic crisis and a credit crunch spreads to large companies, a top Italian bank has warned privately.

Mediobanca, Italy’s second biggest bank, said its “index of solvency risk” for Italy was already flashing warning signs as the worldwide bond rout continued into a second week, pushing up borrowing costs.

“Time is running out fast,” said Mediobanca’s top analyst, Antonio Guglielmi, in a confidential client note. “The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now in special crisis administration.”

The report warned that Italy will “inevitably end up in an EU bail-out request” over the next six months, unless it can count on low borrowing costs and a broader recovery.

Emphasising the gravity of the situation, it compared the crisis with when the country was blown out of the Exchange Rate Mechanism in 1992 despite drastic austerity measures.

Italy’s €2.1 trillion (£1.8 trillion) debt is the world’s third largest after the US and Japan. Any serious stress in its debt markets threatens to reignite the eurozone crisis. This may already have begun after the US Federal Reserve signalled last week that it will begin to drain dollar liquidity from the global system.

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“The bills never get a haircut, so people are fleeing bonds instead as positions gets squeezed,” said one City trader.

Sovereign debt strategist Nicolas Spiro said “taper terror” is jolting eurozone investors out of their complacency, though safe-haven Swiss and German bonds have also sold off sharply in the rout. Yields on 10-year UK Gilts closed at a two-year high of 2.53pc.

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“The European Central Bank needs to take very aggressive steps to offset this,” said Marchel Alexandrovich from Jefferies Fixed Income. “We have a sell-off across the board. If the ECB doesn’t act, it could see all the gains of the past nine months vanish in two weeks, taking the eurozone back to square one.”

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Andrew Roberts from RBS said the world has become “a dangerous place” as Fed tightening marks an inflexion point in global liquidity.

“Central bank stimulus has fed a lovely carry trade and a rising tide has lifted all boats, but unfortunately the opposite is also true,” he said. “We have clear signs in global finance of a generalised meltdown in assets right now.”

Julian Callow from Barclays said the Fed, the Bank of Japan, China’s central bank and others have bought almost the entire $2 trillion issuance of AAA bonds over the past year. The effect of this has been to drive banks, insurers, and pension funds into riskier assets such as the eurozone periphery. This has helped prop up the eurozone, and camouflaged festering problems. “The Fed’s shift towards tightening is highly significant, and it is causing a very dramatic rise in real yields,” he said.

Borrowing costs of 5pc could prove crippling for Spain and Italy, both suffering from contraction of nominal GDP.

Mediobanca said the trigger for a blow-up in Italy could be a bail-out crisis for Slovenia or an ugly turn of events in Argentina, which has close links to Italian business. “Argentina in particular worries us, as a new default seems likely.”

Full article: Italy could need EU rescue within six months, warns Mediobanca (The Telegraph)