Italy bud­get de­ba­cle puts Europe back in global spot­light

Gulf Times Business - - BUSINESS -

As the euro­zone sov­er­eign debt cri­sis pe­tered out, Eu­ro­pean of­fi­cials at an­nual meet­ings of the In­ter­na­tional Mone­tary Fund were happy to move out of the spot­light over re­cent years. Europe was not in the eye of the storm. Un­til now.

The IMF’s an­nual meet­ings, nor­mally held in Wash­ing­ton, this year is tak­ing place on the In­done­sian re­sort is­land of Bali, where a mag­ni­tude six earth­quake wel­comed the world’s 20 top fi­nance min­is­ters on the eve of their talks.

But the tremor, which awoke many of the 10,000 of­fi­cials from all over he world around 3 o’clock in the morn­ing on Thurs­day, turned out to be less of a con­ver­sa­tion topic than a new me­nace to Europe’s fi­nan­cial sta­bil­ity — Italy.

“If you talk to se­ri­ous peo­ple here, ev­ery­body talks about Italy,” one Eu­ro­pean of­fi­cial said.

In­vestors and bank an­a­lysts at meet­ings with Eu­ro­pean de­ci­sion-mak­ers were mainly in­ter­ested in Italy and how the euro­zone could deal with it, of­fi­cials said. “The main top­ics at the meet­ings here are the trade war be­tween the US and China and Italy,” a sec­ond Eu­ro­pean par­tic­i­pant said.

“On Italy, peo­ple ask us what is likely to hap­pen and how we are go­ing to deal with it. They are alarmed but not in panic.” Italy’s new, pop­ulist govern­ment wants to in­crease bor­row­ing over the next three years to make good on election prom­ises of higher spend­ing and lower taxes.

But with a debt pile of 133% of GDP, the sec­ond high­est in Europe af­ter Greece, and rel­a­tively slow growth, Rome can hardly af­ford such lux­u­ries.

Mar­kets also fret that Ital­ian banks, sad­dled with bad loans, and a mas­sive amount of Ital­ian govern­ment bonds, could face crip­pling losses if debt prices keep tum­bling.

Fi­nan­cial mar­kets re­acted to the Rome’s plans with a sharp sell-off of Ital­ian bonds — three-year yields rose to five year highs at an auc­tion on Thurs­day and the bench­mark 10-year pa­per traded at 4-1/2-year highs. The higher deficit also bla­tantly breaks Eu­ro­pean Union bud­get rules, en­forced by the Eu­ro­pean Com­mis­sion, putting Rome on a col­li­sion course with EU in­sti­tu­tions once it sends the draft bud­get for EU checks on Mon­day.

Many of­fi­cials are pri­vately con­cerned about the pos­si­bil­ity of Italy spark­ing an­other sov­er­eign debt cri­sis like the one trig­gered by Greece in 2010 that nearly de­stroyed the euro­zone. Only Italy’s econ­omy is al­most 10 times big­ger than Greece’s.

But some also cau­tion against dooms­day sce­nar­ios. “Here in Bali, some­thing is hap­pen­ing that I have seen in IMF meet­ings again and again.

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