OPINIONS

Curtain falling on the Euro, as Italy weeks away from emergency bailout

Jason Gaywood
Consultant, HiFX
http://www.hifx.co.uk

Post date: Tuesday, 8th November 2011

Greece may well be relieved to be out of the limelight today as attention turns to Italy's burgeoning debt woes.

Prime Minister Berlusconi is facing a crucial vote to ratify his budget. To all intents and purposes this amounts to a vote of confidence in his leadership and its one that is difficult to envisage him winning.

The cost of borrowing for Italy yesterday reached 6.67% amid the perception that the chances of the debt actually being paid off looking increasingly unlikely. This is a damning statistic for Rome as once the interest paid by Ireland, Portugal and more recently Greece reached these dizzying levels, they all needed emergency cash bailouts from the EU and the IMF within weeks.

More worrying for the rest of us is that Italy currently owes EUR1.9 trillion. At 7%, that level of borrowing would cost EUR 70 billion a year in interest alone to service. This clearly is unsustainable.

The recently boosted European Financial Stability Fund (ESFS) - hailed by many as the saviour of the EU only amounts to merely a leveraged EUR1 trillion. There simply isn't enough money to fund these debts.

There are only two possible options for financing the beleaguered economies within the EU.

The first, full fiscal integration seems further away and less likely to be accepted and implemented than ever and can be accurately described as impossible in the current conditions.

The other choice would be to employ the European Central Bank (ECB) as a ‘lender of last resort' by having them print vast sums of money under the guise of QE.  

This is somewhat of a non-option as it is illegal under the current constitution of the EU and given that the big player in this game - Germany, still shudders at the memory of hyper inflation under the Weimar Republic, any amendment that would allow Berlin to pay for the debts of its poorer neighbours seems even less of a viable outcome.

Papandreou has gone, Berlusconi may be next. One thing seems certain, the death of the Euro as we know it is only a matter now of when, not if.

The Global Trader Guide to European Markets 2011 is now available. To read the publication, click the ebook.