Is Italy heading for a bailout?

Spain’s recent struggle to meet its deficit goal for 2012 and its need for a rescue bailout of €100 billion has sent alarm bells ringing as to whether Italy will follow suit in the near future.

Last November, Prime Minister Mario Monti was brought in to  rescue Italy’s underwhelming financial system. His appointment led to the formation of a technocratic government and reforms that has long been lacking as a result of years of political bureaucracy and an apathetic justice system under the Berlusconi leadership.

On asking whether a similar bailout is likely to occur for Italy, Marco Simmoni, Lecturer in European Politics at the London School of Economics firmly denied so. “The structure of Italian financial banks is much more solid and their economy is robust, with a higher budgetary control compared to that of Spain,” he said. “Also the manufacturing industry is and always has been stronger than its European counterpart.”

Raoul Ruparel, Head of Economic Research, Open Europe echoed this thought, adding, “There are fewer short term economic triggers which could push Italy into a bail-out. Its long term prospects are undoubtedly bleak, particularly without widespread reform, but it should be able to finance itself in the short term – although this will obviously be impacted by how events progress in Greece and Spain.”

Notably, unlike Spain and Greece, Italian households and corporations are not heavily indebted. It is the public debt that is weighing them down. “There is less chance of this being a drag on spending in the economy as in other countries, while the state is unlikely to have to guarantee any private sector burdens anytime soon,” said Ruparel.

Italians are renowned for their large family business and entrepreneurship, with a strong presence in manufacturing everything from cheese to cars, fashion and even car tyres. Moreover, unlike Spain and Ireland, they did not take huge gambles in the housing sector, which led to a boom and bust for those economies.

“The Italian government is currently working on a review of all public spending items, with the aim of finding an extra €5billion in savings by the end of the year, to avoid a regressive increase in VAT, ” said Ruparel.

So there is hope, but there are concerns raised on the effectiveness and implementation of new reforms. Apart from the pension reforms, newly introduced property tax and incentives to investment from real estate, other policies on increases to market flexibility in the private sector and measures to liberalise a number of ‘closed’ professions (including notaries and pharmacists) have come under threat in parliament.

Infact the last two policies have had a severe impact on Prime Minister Mario Monti’s approval ratings which fell drastically to 38 per cent last week of May, compared to 71 per cent six months ago when he came into power, according to a poll by the SWG agency.

Leading industrialists, political parties and trade unions in Rome have created an overhaul, insisting these new labour reforms have made it easier for companies to lay off workers and push employers to offer more permanent jobs instead of the insecure, temporary contracts for new hires.

Recently, many reports in the Italian press suggest parties supporting him in parliament have become increasingly critical of the Prime Minister, who is often finding himself trapped between having to enforce austerity reforms and keeping the morale of the Italians upbeat.

Part of the concern over Italy’s economy is its slow growth, which has been a long-standing problem for Italy – stemming from inefficient taxation and spending, burdensome regulations and corruption.

Despite claims that, the country won’t need a bailout in the immediate future, Monday saw the stock markets plunge and the Italian bond yields rise to 6.28 per cent, falling closely behind the Spanish bond yields.

With a mounting €1.9 trillion debt many are asking has Italy missed the boat? Ruparel insists Italy can still avoid the situation Spain is in, although it needs to reform significantly to avoid a prolonged period of low growth.

He added, ” Although the state is facing higher borrowing costs, it can handle this in the short term given the size of the economy. If it persisted then it would surely cause problems but with the horizon of a few months, it is likely to be manageable. The government can also rely on its domestic banking sector to buy up large amounts of its debt using liquidity from the ECB. The banks look stable – reasonable leverage and limited external funding requirements.”

Comparing it to the Japanese economy, he said, “In many senses Italy is closer to Japan than some of the other eurozone economies – this may not seem like a favourable comparison but remember that despite its huge debt load Japan has managed to finance itself at low rates.”

” What we need is re-organising of capital and not spending cuts. If the capital is used effectively we can benefit to create growth,” said Simmoni.

With the elections scheduled for next March, the Italians are hopeful the government will work on reducing the deficit and create growth. But in the next few days, many are waiting with bated breath on the outcome of the Greek election, which is inevitably likely to influence events in Spain and Italy.

Moving forward, Simmoni said, “Now much of the risk lies higher with the potential warring of the European leaders to solve the instability of the crisis.”

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