by Cullen Roche
I can’t really describe how important it is that the markets are now turning their attention on Italy. Italy is simply too big to bail. With debts of $2.5T it is the equivalent of Greece, Ireland and Portugal combined and represents 25% of ALL Eurozone debt. It’s hard to believe that the core nations would be willing to bailout Italy without first conceding that the entire EMU has failed. In a recent strategy note Morgan Stanley emphasized this point:
“Too large to rescue. However, the recent spreading of the debt crisis to Italy, the euro area’s third-largest economy and the third-largest government bond market in the world, has significantly increased the stakes for policy-makers. Italy is not too large to fail, but in our view, it is too large to rescue, if this ever became necessary. We expect a combination of Italian fiscal austerity measures to be finalised soon and additional euro area-wide measures such as an agreement on a second Greek rescue package and an increase in the scope and flexibility of the EFSF, possibly coupled with a reopening of the ECB’s bond purchase programme, to help contain the crisis (for more detail, see Cross-Asset Navigator: Crisis: Response, July 13, 2011, page 3). We are mindful, however, of the high and rising risk that severe policy divisions between and within the euro area governments prevent agreement on such stop-gap measures, which would raise the spectre of a much larger crisis, recession and, potentially, a break-up of the euro (see also Euro Wreckage Reloaded, April 14, 2010). “
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