Italian Bailout Urged By Fitch Ratings to Prevent Euro Implosion

Fitch Ratings, one of the Big Three credit rating agencies, is urging the European Central Bank to buy up Italian debt, or else Italy might collapse and take the Euro with it.  From a Reuters report:

Speaking to investors as part of a European roadshow, Riley said the collapse of the euro would be disastrous for the global economy, and while it is not Fitch’s baseline scenario, it could happen if Italy did not find a way of its debt problems.

“The end of the euro would be cataclysmic. The euro is a reserve currency,” Riley said. “What would that do in terms of financial and political stability?”

“It is hard to believe the euro will survive if Italy does not make it through,” he said, adding that while many saw Italy as too politically and economically important to be allowed to fail, “one might also argue that it is too big to rescue.”

There are also fears that Greece will either implode or leave the Eurozone, which generates uncertainty.  Uncertain investors don’t make investments.  Lack of investment makes the Euro even weaker.  No sooner had Fitch issued its call for buying up Italy’s debt than European and global stock markets fell, because the call made investors nervous, and bond auctions for Spain and Italy are coming up next week.  It’s a vicious cycle – or, if you prefer, a death spiral.

Italy’s previous bond auction came at the end of December, and sales were disappointing.  The ECB had to step in and buy a big chunk of Italian debt, as explained by AdvisorOne:

The ECB stepped in after the auction concluded, since Italian 10-year yields stayed firmly above 7% percent on the secondary market. It has already sunk nearly half a trillion euros in cheap bank loans into the market. About 91 billion euros in Italian bonds will come due between January and April of 2012.

Nicholas Spiro of Spiro Sovereign Strategy was quoted saying, “Given the scale of its funding requirements, there are still big concerns about Italy’s ability to get through 2012. Next quarter is going to be all about Italy.”

Italy’s treasury needs to fund a gross amount of about 450 billion euros for 2012. While shorter-term bonds are generally well supported by domestic retail investors, longer-term debt usually goes to foreign investors; the sale offered a clear indication of how foreign buyers regard the quality of Italy’s debt.

Well, now the foreign investors aren’t buying enough long-term bonds, so the central bank (which ultimately means taxpayers – and not just European taxpayers) has to step in and keep the Italian game running.  If they don’t, the Italian economy will plummet… and suddenly those “domestic retail investors” might not have the cash to keep short-term bonds “well supported” anymore.  Of course, eventually the money for compulsory purchases of long-term bonds that don’t make financial sense to private investors will run out.  Europe is just about there.  Even the relatively solvent economies are starting to tremble.  Standard & Poor’s is thinking about a credit rating downgrade for France.

One of the big reasons Italy is in such rough shape is that it was formerly able to sell its debt easily.  Financing big government spending was a breeze.  Bonds just flew across the auction table.  The good times would roll on forever!  Eventually, that rolling debt became an unstoppable avalanche.  Conditions unimaginable to yesterday’s free-wheeling big spenders are now in effect. 

Luckily, there’s a larger political entity with deeper pockets Italy can stick it to, and as Fitch analysts pointed out, they have few good alternatives to an Italian bailout.  Except, as you’ll often hear Euro-watchers declare with dismay, Italy is both too big to fail, and too big to bail out.  Yesterday there were choices, but no one wanted to hear about dire consequences to come, because debt was so very easy to finance.  Today there are no choices, and central banks must ignore their financial instincts to do what must be done.  Tomorrow, what must be done will become impossible.

Does all of that sound familiar, fellow Americans?