Italy and Spain scare away investors. According to the International Monetary Fund's Global Financial Stability Report, the two countries suffered large-scale capital outflows between June 2011 and June 2012. And it's not just a few million euros. For Italy, capital flight involved 235 billion, about 15% of GDP in 2011. In Madrid things went even worse: -296 billion euros, about 27% of GDP.
According to the IMF, "the withdrawal of foreign investors from the peripheral bond markets drove a large part of these flows, especially for Italy". And not only. There is a risk of seeing sovereign ratings downgraded again: higher spreads and worsening debt-interest-to-revenue ratios could lead to further sovereign downgrades. “Rating agencies are maintaining negative or Watch negative outlooks” and “even if spreads remain at current levels, euro area states are facing a growing burden of debt interest payments”.
In short, the future is not exactly rosy. According to the IMF, “the base scenario implies that in Italy and Spain the burden of interest on debt will rise to 14% of revenues by 2017” and the worst-case scenario – which assumes an increase in spreads for the two countries of 300 and 330bps respectively – could push the ratio to 18% for Rome and 15% for Madrid.
Then worry about the credit crunch. “The recent decline in bank lending to non-financial corporations in Italy and Spain”, reads the report, “is in line with a deleverage pace that should bring the credit-to-GDP ratio to 2003-2004 levels by 2017”. “The record of bond issuance by some large Spanish and Italian companies immediately following the announcement of the ECB's OMT program suggests that some companies could replace financing from banks with financing from the markets, if the benefits of the OMT are sustained”, argues the IMF, adding however that “the majority of companies traditionally dependent on bank credit will hardly benefit from it in the same way”.
