The Daily Update - Italy Hits the Wall

In a stark warning last week, Ewald Nowotny, a European Central Bank Governing Council member said that Italy is as close as it gets to being ‘too big to fail’. Nowotny went on to say that although Italy ‘is a core country of the European Union, nothing in the world is ‘too big to fail,’ but if anything comes close, it’s Italy. However, when in doubt, nothing is ‘too big to save, either’.

One of the main reasons that the ECB is looking at the Italian situation with increasing concerns is because according to some respected former ECB bankers, the EU does not have any legal means to force Italy into changing its current stance towards its budget and subsequent deficit. The European Central Bank’s former financial stability chief, Vitor Constancio, believes increasingly frosty relations between the EU and the Italian government will be extremely difficult to handle as the EU is basically powerless against a net contributor to the EU budget. Constancio thinks that the ECB can only act once markets force a bond crisis. He told a gathering in Brussels that  ‘Financial markets will dictate the outcome’ believing, rightly, that ‘Italy cannot win against the market’.

As yet there is no sign of any middle ground being found in the fight between Rome and Brussels. The EU warned that ‘Italy’s fiscal plans are based on implausible growth assumptions and that the violation of the Stability Pact is even worse than feared’. Unsurprisingly that is not how the big wigs in Rome see it, with Giovanni Tria, the finance minister dismissing out of hand the commission’s analysis as ‘technical incompetence’.

The chairman of Societe Generale, Lorenzo Bini-Smaghi, has hit the nail squarely on the head with his view of the approaching car crash, stating that ‘Italy is going straight into a wall. The crash is going to be violent’.

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