Report says Italy set for financial disaster

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LONDON, England (UPI) -- A research group from the United States says Italy faces a catastrophic explosion of public debt unless it gets a 20 percent currency devaluation.

Banque AIG`s financial office described the coming crisis, in a newly released report, as a "horrible martyrdom" that stems from Italy "being asked to bear the unbearable," the Telegraph reported Friday.

Italy has lost 30 percent of its world share of exports since the late 1990s and is now "on its knees," the study said, drawing comparisons between Italy`s current state and Argentina in the final throes of its disastrous dollar peg.

The report also noted Italy`s public debt is 105 percent of gross domestic product and rising fast.

Rome`s REF research institute is predicting Italy`s deficit in 2005 at 5.7 percent, well beyond the permitted 3 percent limit set by the European Union.

The likelihood of a currency devaluation, at least on the scale needed by Italy, is widely considered non-existent.


monstersandcritics.com

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Italy faces 'horrible martyrdom' while in the eurozone
By Ambrose Evans-Pritchard (Filed: 20/05/2005)

Italy is in much the same mess as Argentina in the last throes of its disastrous dollar-peg and faces a "horrible martyrdom" as long as it remains inside the eurozone, according to a market report issued yesterday.

Banque AIG, the financial wing of the US insurance giant, said Italy needed a 20pc devaluation to prevent a slump and a "horrendous" explosion of public debt. The warning came as fresh data from Portugal and Italy point to the worst budget deficits since the launch of the euro.

Portugal's central bank has revealed that the country's deficit was likely to reach 7pc in 2005, far higher than earlier estimates. Lisbon is mulling "Draconian" cuts that risk driving the debt-laden economy into deep recession. Rome's REF research institute forecasts an Italian deficit of 5.7pc next year, smashing the EU's 3pc limit.

Both countries have seen a sharp loss of competitiveness under the European Monetary Union, chiefly through higher wage inflation than Germany. They now face grinding "deflation" to claw their way back to health.

The AIG note, by chief economist Bernard Connolly, a former EU official and stern critic of EMU, said Italy was "being asked to bear the unbearable".

It has lost 30pc of its world share of exports since the late 1990s and is now "on its knees", according to the industry federation.

Toby Nangle, author of a new study on the Argentine crisis at Baring Asset Management, said there were close parallels between Italy's plight and Argentina's dollar-peg ordeal.

Markets remained complacent about Argentina until a political crisis in October 2000 changed the mood, causing bonds spreads to widen sharply.

"Italy's fiscal and debt position is worse than Argentina's," he said.

Public debt is 105pc of GDP, and rising fast. Some $192billion of debt is due in 2005. The "spread" between Italian and German bonds has edged up over recent weeks, but there is no sign of real concern.

AIG said investors assumed there would be an EU bail-out if necessary, even though this breaches treaty law and would enrage German citizens. "The endgame will be tortuous, but there can be no doubt that it will involve a rise in credit spreads and extreme weakness of the euro. An ultimate break-up can no longer be ruled out, however horrible its financial consequences," said Connolly.


Daily Telegraph