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Italy can be a catalyst for a new wave of crisis in Europe
Material posted: Publication date: 03-09-2013

Today, the main problem of developing countries and world economy as a whole is a constantly changing situation on the capital market: today the inflows, outflows tomorrow.

However, the problems of emerging markets divert our attention from other equally important events, such as the crisis in Europe, which, after a break in September may again become a question number one on the agenda of the global economy and financial markets.

There are a number of reasons. Among them, the funding situation of Greece, uncertainty over the status of Portugal. Unpleasant surprise for Europe can give, and Italy. The situation there is heating up under the influence of the policy of the Teutonic (German) ordoliberalism (one of the directions of neoliberalism – approx.Mixednews),which, according to Mario Draghi, took over the minds of the ECB. Italy's problems will surface before the parliamentary elections in Germany.

Last week the Italian government has decided to cancel a controversial property tax paid on main residence. This means that the hole in the budget for 2014 will have something to fill.

The government Letta just linked hands until it is a part of the fragile Grand coalition (Grand coalition), which was originally formed not to bring the matter to the President's resignation and subsequent constitutional crisis. It is not able to make serious decisions, including, to conduct election reform, you have to fight with the weakening of the government. Instead, Letta is engaged in less important things. For example, on 26 August, the government decided to reduce by 20 percent the funding for the procurement of government vehicles.

Many members of the centre-right coalition of Berlusconi threatening to resign if the centre-left forces will vote for the resignation of Berlusconi. This discussion should begin on September 9 and will probably take several weeks before a final vote. But any solution does not promise anything good Italy.

If the court's decision will come into force and Berlusconi is forced to resign, the government of Letta can fall apart and the fate of the 2014 budget will be under question.

If the centre-left will find the courage to bring into effect the sentence of the court, as the saying goes, Berlusconi will press Letto to the wall. This will be a proof that the centre-left don't want to participate in the elections, and Berlusconi will have the opportunity to dictate their terms, and will be eligible to vote when approving the budget for 2014. This is not just a victory for Berlusconi, this will be a defeat that demoralized center-left political forces and their leaders.

A new wave of political tension in Italy will affect the behavior of investors. Italian assets like bonds and shares not already demonstrate the best dynamics. The yield on 10-year bond over the past three months has risen by only 40 basis points, despite the fact that a third of the increase came in the last week.

The gap in the yields of German and Italian 10-year bonds rose by almost 30 points, after in August reached its two-year low. The discount in relation to Spanish bonds fell to its lowest level since March 2012. The yield on two-year bonds struck a two percent threshold for the first time in the last few months.

The increase in bond yields coincided with the decrease in the attractiveness of Italian stocks. According to the results of the last five sessions, the indices of the Italian stock exchange the worst among the G10 countries. Worst things in the banking sector. It is banks, not government securities are the Achilles heel of Italy.

This explains the fact that the public credit swaps increased in price more than expected. Market swaps are used to cover not only risks a default on government bonds, but also of default of Italian banks that fare poorly against the background of rising number of bad loans carried on their balance sheets. Italian banks are also lagging behind others in terms of repayment of funds borrowed from the ECB in REPO operations.

The problems Italy can upset the delicate balance in the Euro area. And in conjunction with the fed's winding down of the program of redemption of government bonds, this could affect the markets of the periphery and to cause another wave of crisis in Europe.

Source translation for MixedNews - Natalia Yaroshinskaya


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