Tuesday 20 September 2011

Italy Downgrade

As predicted in my post Sleepwalking into Disaster just two days ago, Italy has been downgraded by Standard & Poor’s today. It’s only a question of time before the remaining ratings agencies follow.

Italy and several other Eurozone countries are facing a credit rating monitoring starting this week. In my opinion, the outlook is negative. A ratings downgrade of Italy may be averted, but is unlikely. I forecast a 55-65% chance of a ratings downgrade. This will set off yet another financial firestorm, both in terms of bond yields of other at-risk countries, as well as in shares of banks exposed to Italy. Beware a run on France.

The market results will be immediate, and will likely lead to contagion in France by the end of the week. As quoted in the Financial Times

S&P cited Italy’s “weakening economic growth prospects” and the difficulty of the “fragile governing coalition” being able to “respond decisively” to the crisis.

“This is a downgrade of EU and Italian politicians,” said Sony Kapoor, head of Redefine, a Brussels-based economic think-tank. “The miserable failure of EU leaders to tackle the problems posed by Greece does little to inspire any confidence that the much larger and more urgent problems faced by Italy would be managed any better.”

Unless urgent measures are taken, including a radical expansion of EFSF and an explicit commitment that between the ECB and the EFSF, the Eurozone has at least EUR 2 trillion at its disposal to refinance its member states, the results are going to be dire as we move towards December 2011.

© Philip Ammerman

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