A day ago Moody’s downgraded Italy’s credit rating from Аа2 down to А2, with a negative outlook. The news wasn’t a surprise for the Italian authorities. Silvio Berlusconi said the rating cut was predictable.
Italy’s rating cut will inevitably make rating agencies downgrade the rating of Italian banks, which will make lending even more difficult and costly for them. 2 weeks ago Standard & Poor's also downgraded Italy’s credit rating from А+ down to А, with a negative outlook.
What does the rating cut mean for Italy and its investors?
In advance of the rating cut by Standard & Poor's the Italian government signed a document called “the financial maneuver”. According to it by late 2013 the budget spending will be reduced by € 54,3B. Silvio Berlusconi said it was a hard step for him. The maneuver implies an increase in the VAT (from 20% up to 21%) and the introduction of an extra tax for the rich (3% of the annual income of over € 300K.). It is also planned to accelerate the pension reform and other measures painful for the population, labor unions and the opposing political parties. The German parliament approved the government’s plans to increase the EFSF in order to help the debt-ridden eurozone states to solve their problems.
Nevertheless, such brave steps taken by the eurozone and Italian authorities failed to reassure Standard & Poor's and Moody's.
The EU leaders have recently expressed a lot of discontent over the rating agencies’ latest activities, which caused panic in the markets).
Italy and Greece: are they comparable?
experts say that even the latest cut in Italy’s rating is better than Greece’s junk rating. However they say there are some common features:
· Italy’s public debt is getting close to 130% of the GDP, thus making Italy the second largest debtor in the eurozone after Greece in relative terms.
· At the same time the Greek and Italian economies are incomparable in terms of volume. In absolute figures, Italy’s debt is equal to €1,89 trillion!
· In order to refinance its urgent debts Italy needs €120-130B.
According to the analytic team of Forex Trend, Italy’s major problem is too low pace of economic growth:
· The current increase in Italy’s GDP is the lowest in 10 years for the entire EU.
· According to the UK’s Centre for Economics and Business Research, with bond interest rates over 6% and record-low pace of economic growth, by 2017 Italy’s public debt will be equal to 150% of the GDP.
· The only lifesaver for Italy is an economic boom, which is unlikely to happen as in Q1 2011 the Italian economy gained only 0.1%. Italian politicians keep trying to reassure everyone that everything is fine with Italy and that there are no threats of Italy facing a major crisis. However, some facts tell us the opposite. For example, those Chinese investors who used to be willing to by Italians T-bonds a couple of weeks ago now seem to have rejected the offer. experts say that the partial selling of Enel and Eni’s stocks (Italian energy giants) seems even more alarming.
Is the political will exhausted?
Angela Merkel has already compared Italy to Greece. It seems like some EU leaders are fed up with constantly saving debt-ridden eurozone economies.
Sergei Ignatiev, Chairman of the Bank of Russia, financial market participants start questioning Italy’s ability to service its public debt. He says the EU authorities are trying to resolve the problem but the decisions are delayed and inefficient.
David Cameron, British Prime Minister, shares his opinion by saying that a delay in making radical decisions threatens the entire EU and even the global economy.
Nouriel Roubini assumes that to save the eurozone it is necessary to attract at least €2 trillion within the next 2 weeks, which is next to impossible.
Consequences for the eurozone’s banking sector. The eurozone’s banking sector (especially the one of Germany and France) will be the biggest victim in case Italy defaults on its debt. France is the biggest holder of Italian bonds ($ 392B) while Germany is the 2nd biggest holder of Italian bonds - $192B.
Nouriel Roubini says that Greece is not the eurozone’s major headache. It is all about Italy and Spain . Their economies are too considerable for the EU to let them collapse but they are also too big to easily get them out of the debt abyss.
How close is the collapse of Euro?
According to , any default by Italy (whether natural or initiated by rating agencies) will lead to major changes within the eurozone. In this case 2 scenarios are possible:
· The eurozone excludes Greece, Italy, Portugal , Spain and Cyprus . In this case Bulgaria, Romania and some other East European countries may forget about entering the eurozone.
· The eurozone is disintegrated, with all the former eurozone members getting back to their national currencies. The “tsunami” initiated by this disintegration will hit the entire world. The consequences will be much more serious than those seen in 2008 after Lehman Brothers went bankrupt.
EURUSD prospects:
According to the Department of Masterforex-V trading system , EURUSD continues its downtrend and is currently around the 1.3089 - 1.3134 support area. Once the price breaks and consolidates below the area, it will get an opportunity to reach another major area of support (1.2971 - 1.2972 and 1.2874). It is useless to consider any reversal or even a deep upward retracement until the price break above the MF pivot 1.3678 (as shown below):
Market Leader and would appreciate it if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following questions:
Will Italy default on its debt, thus causing another major crisis?
