With Italy in the eye of the storm of the EU debt crisis amid rumors that the European Central Bank has intervened by buying Italian sovereign bonds on the secondary market, analysts are coming to the conclusion that Italy is ‘too big to bail’ given its massive funding requirements and total debt outstanding of €1.6 trillion ($2.2 trillion).
Italian equities managed to record some gains during Tuesday’s session, up 1.3% after a terrible two-day beat-down that led to some of the largest spread moves in sovereign bonds in the European monetary union’s history. Yields on benchmark 10-year Italian bonds fell marginally on Tuesday and stood at 5.66%, just below Spain’s 5.96%.
With a plethora of negative news coming out of Europe on a daily basis, it is hard to attribute this Italian crisis to one event, but what is undeniable is that markets are coming to the realization that Italy is a whole different animal from Greece, Ireland, and Portugal, and that bailing it out might deliver a final blow to the beleaguered European Union. (ReadEuro Contagion: Italian Equities Tank, Yields And CDS Jump).
Differences are staggering. While funding requirements for 2012 for the three PIIGs that have already been bailed out total €91 billion ($127 billion), Italy’s funding requirements reach a massive €250 billion ($350 billion). Total outstanding debt for the country run by Prime Minister Silvio Berlusconi is around €1.6 trillion ($2.2 trillion), compared with €345 million for Greece, and about €150 billion each for Portugal and Ireland, according to analysts at Nomura.
If Italy were to fail, the problem would be that it is too big to bail. Nomura points out that current European Financial Stabilization Facility (EFSF) mechanisms were designed to deal with the failure of relatively small countries being bailed out by a relatively large group of participating Eurozone countries. The equation changes for Italy.
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