"The crisis in confidence that has battered financial markets and hit Italy in recent days is a threat for everyone" ... Silvio Berlusconi. "The crisis in confidence that has battered financial markets and hit Italy in recent days is a threat for everyone" ... Silvio Berlusconi. Photo: AFP
LONDON: Europe's debt crisis is on the verge of engulfing its biggest victim, Italy, the world's seventh-largest economy, whose size could thwart any international attempt to bail it out.
Italy's woes have generated investor panic amid concerns of political infighting in Rome over budget cuts. More than anything else, investors appear to be losing confidence in the ability of bickering European leaders to come up with a lasting solution to the 20-month-long debt crisis, triggering a spread of the region's financial woes from small nations such as Greece to the far larger economies of Spain and now Italy.
The addition of Italy to the so-called PIGS of Europe - Portugal, Ireland, Greece and Spain, financially troubled nations on the brink - marks what economists say is a serious escalation of the stakes. ''The crisis in confidence that has battered financial markets and hit Italy in recent days is a threat for everyone,'' Italian Prime Minister Silvio Berlusconi warned on Tuesday.
US officials have for months urged Europe to take more forceful steps that would ''ring fence'' the debt crisis to smaller countries and create confidence that larger nations such as Italy and Spain would not be endangered. That is because a full-blown crisis in Italy would be an order of magnitude worse. Italy is the euro zone's third-largest economy and a member of the G20.
Its deep connections make it a potential source of financial contagion: German and French banks have about $US36 billion ($33.7b) invested in government bonds of Greece, but they hold nearly $US150 billion in Italian debt. US investors, including big banks, hold $US36.7 billion in Italian debt.
On Tuesday, European financial leaders gave some investors more reason to fret. Bitterly divided over how and whether to extend additional rescue funds to Greece, officials meeting in Brussels appeared to be no longer ruling out a limited Greek default that would affect some investors. That puts European financial officials largely at odds with the European Central Bank, which has argued that such a move could be disastrous.
Though a limited default could be largely technical in nature, economists warn even that could turn the embers of investor panic in nations such as Italy into flames.
European leaders were scrambling to arrange an emergency summit to address the crisis, perhaps as soon as Friday. ''What you are seeing is a deterioration of market confidence,'' said Thomas Mayer, chief economist with Deutsche Bank in Frankfurt.
The first significant signs Rome was catching Athens' malady emerged last week, when investors began dumping Italian bonds and selling off the stocks of banks such as UniCredit that are heavily exposed to Italian debt. That accelerated on Monday, three days after Berlusconi fuelled concerns of Rome's commitment to the passage of $US56 billion in budget cuts by making disparaging remarks about his finance minister Giulio Tremonti.
''I think Italy is in a much better position than Greece still, but clearly the Europeans now need to make sure that Italy doesn't go,'' said Jonathan Tepper, partner at Variant Perception, a London research firm.
''That would be bad, and not just for the Europeans.''
Washington Post