Italian Prime Minister Berlusconi To Resign: Investors Dig Deeper Into EU Debt Crisis:
The Prime Minister of Italy Silvio Berlusconi will be resigning and won’t attempt reelection. Market participants are still digesting news about Italy as investors dig deeper into the EU debt crises to analyze the situation. Italy is the third largest economy in the euro zone and it has six times more debt than Greece. This would make haircuts for Italy – baldies compared to Greece. The need to reach an agreement to sure up Italian banks could prove to difficult for the EU/IMF and austerity measures may not be enough to avoid a continuation of the crisis.
The Greek bailout took several weeks to unravel and many analysts/economists ignored the cultural perspectives that made such a package so difficult to get broad agreement. The current inspection of Italy’s debt as it relates to the EU calls into question the political economy aspects of the EU debt crisis that make solutions more difficult than for Greece. Our analysis this week showed a high likelihood that Prime Minister Berlusconi could follow Greek Prime Minister Papandreous’ lead (see Is Italy the next shoe to drop? Will Berlusconi be forced to resign? November 7, 2011) but while this may have lead to temporary gains in sentiment, a closer look at the books may show the problem is exceptionally deeper than once anticipated and contagion effects could be large -they may have already begun. Italy’s bonds will continue to tell the story for the next few days and volatility in world as well as U.S. equities markets will help determine if investors think the crisis has more legs.