Bailout 5.0: Italy Needs Financial Aid Too

by ETFguide | June 14, 2012 11:00 am

Italian_Flag_185Europe’s bailout club already has four members (Portugal, Ireland, Greece, and Spain) and a fifth is about to join them: Italy.

In a rare show of frank opinion, Austrian Finance Minister Maria Fekter said Italy, the third largest economy in the eurozone, probably needs financial aid because of high borrowing costs.

Fekter was almost immediately rebuked by Italian Prime Minister Mario Monti, who was interviewed by a German TV network whether his country would need a bailout. “I don’t believe so,” was Monti’s response.

Meanwhile, the yield on 10-year Italian debt hit 6.26%, its highest point this year. In November 2011, the yield on 10-year Italian bonds reached a record of 7.48%, despite the European Central Banks’ plan to backstop Italian bonds.

Opinions about the euro over the past few years have never been so wrong, here’s a sample:

Euro could become world’s leading currency” – Reuters 12/31/11

The Future Reserve Currency is the euro” – David Roche, global strategist at Independent Strategy on CNBC 6/14/10

Europeans see euro trumping dollar” – Financial Times 12/28/08

Euro may become top reserve currency by 2022” – National Bureau of Economic Research 8/5/05

Italy has $1.9 trillion in public debt, which is 120% of its GDP. Tax hikes and pension reform have pushed the Italian economy into deeper recession.

How will this impact the euro and where will the next big move be?

Unlike Greece or Portugal, Italy (NYSE:EWI[1]) plays a key role in the euro’s survival or demise. Italy has the third largest economy but it also has the dubious title of the second most indebted euro zone country, right after Greece (NYSE:GREK[2]).

Over the past few months, the International Monetary Fund (IMF) and the Europe’s bailout fund have bolstered their war chest. IMF, (AKA, the “world’s lender of last resort”) increased its lending capacity to $700 billion, while Europe’s rescue fund expanded to $925 billion. In either case, Italy is too big to bail out.

Contrary to misleading views, ETFguide has been consistent in its warnings about Europe. Targets for GDP growth and budget deficits are still badly off-mark.

A Greece exit from the euro (NYSE:VGK[3]) exposes European governments to massive losses on their loans. The ECB and IMF are Greece’s main creditors and they are hardly ready for what awaits them with Spain and Italy. Ironically, the U.S. (NYSE:DIA[4]) and Japan (NYSE:EWJ[5]) —  both over indebted nations themselves — have the largest IMF stakes. Think of it as the weak and feeble rescuing the weak and feeble.

The April euro trade we gave to readers recorded a 114% gain, due to a decline in the euro’s value (NYSE:FXE[6]). There’s money to be made during this uncertain environment – but only if you’re on the right side of the trade.

  1. EWI:
  2. GREK:
  3. VGK:
  4. DIA:
  5. EWJ:
  6. FXE:

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