Market Future India - Free Share Market tips, Trading Tips, Today's Market Analysis Report

Market Future India - Free Share Market tips, Trading Tips, Today's Market Analysis Report

Italy: Definitely too big to fail, maybe too big to bail
We may be nearing the finale of the Euro crisis that has been building for at least a year and a half.
What Italy does now, and how governments and markets respond, may determine whether we have been watching a tragedy or something less serious.
Whatever it is, it definitely has elements of both.
Italy is the domino that cannot be allowed to fall over, because it would risk knocking over too much else.
Yet it is also so large that saving it requires huge financial resources. Italy has well over $1 trillion of government debt, about 1.2 times the annual output of the whole nation.
It cannot afford to pay an interest rate of 7% or 8% without major cutbacks, so the rates now demanded by the market are unsustainable.
Official: Italy will adopt austerity measures
Either Italy and its partners in the eurozone calm the markets, or Italy is likely to eventually restructure its debt by imposing losses on the current bondowners. A big problem is that cutting the debt could impose half a trillion dollars or more of losses on other parties.
Such a level of losses would do real damage to the European financial system and both directly and indirectly on the wider economy.
Worse, an Italian default would almost surely force defaults by Spain, Portugal, and perhaps Ireland, since their access to the bond markets will dry up as justifiable fear spreads. (Why own a bond paying even 10% if you think 50% losses may soon be imposed?)
This matters because Spain is nearly as big as Italy.
Eurozone governments and the European Central Bank would be well-advised to prevent an Italian default at almost any cost (as the rest of the world has been screaming recently).