Waiting for news on the aid plan for Spain, investors wonder about what will happen to Italy. Already because the market's reaction to Madrid's request for aid (so as to trigger the ESM stability mechanism and the ECB's intervention) is unpredictable: will the markets calm down or will the pressure also increase on our country?
Whether Italy will need some degree of aid and will eventually ask for it depends on several factors, including the April 2013 elections, he comments Morgan Stanley in a report that aims to take stock of the situation in our country analyzing their strengths and weaknesses. At the same time the psychology of contagion is such that when a Eurozone government 'gets run' then investors naturally shift their attention 'to the next weak link'. In other words, theThe market pressure on Italy could intensify once Spain asks for European aid.
Sure, admits Morgan Stanley, lUp until now, Italy has been a "good student" under the government of Mario Monti. He has pursued an ambitious agenda and fiscal consolidation and, successfully thwarted, structural reforms. And even if the first (consolidation) will predictably have a negative impact in the short term and the second (structural reforms) have not yet reached a critical mass, for analysts lhe direction (although not necessarily the scope) of these measures is the right one and goes in the direction of European wishes.
The crucial risk at this point is in the amount of refinancing that the government needs, which makes Italy very sensitive to changes in market sentiment. And so, unless there is an unseen European political response that goes beyond expectations, theItaly can choose between pursuing its fiscal and reform agenda with higher or lower interest rates.
"Some commentators believe that the extra conditionalities that will probably be imposed are an insurmountable obstacle for Italian politicians in requesting the intervention of the EFSF/ESM - writes Morgan Stanley - but we do not agree and believe that, although it is not the 'preferred option, market pressure is more important'.
Of course, for analysts the excessively rigid conditions will certainly be an obstacle, especially for a caretaker government that finds itself making decisions that will exert their effects beyond its duration, but not insurmountable: "Italy is not starting from scratch and we think he can negotiate good conditions”, notes Morgan Stanley. Furthermore, “given the significant financial ties, Italy has a certain negotiating power should it have to negotiate the conditions for aid. And this could also push European lawmakers to seek a longer-term solution to the crisis”.
So does it make sense for Italy to ask for help from the ESM to lower interest rates? “The obstacles remain high, but if market pressure were to intensify again, Italy too could be pushed towards the request for aid. And if this allows for pursuing reforms and achieving lower borrowing costs, markets may not necessarily take a negative stance."
But what do investors think? A survey conducted by Morgan Stanley and reported in the same study, reveals that only 13% believe that Italy will need to ask for aid immediately after Spain, while for 22% it will not be necessary. However, more than half think that Italy will be able to ask for help only in response to specific triggering factors: 20% due to a new stressful situation on the markets and 45% due to a recurrence of specific Italian problems. In short, the key factor to look at is not only whether systemic risk flares up in Europe, but also if the economic scenario deteriorates (for analysts, growth will not return before mid-2013 and its estimates remain below official data and consensus), either a stronger than expected process of deleveraging of banks is triggered or political uncertainty increases. “The survey – concludes Morgan – suggests that Italy could ask for aid for investors but the timing is very uncertain”.
