Fears in Rome after Spain bank rescue

Even as the global economic community hailed an agreement to rescue Spain’s stricken banks, there was concern in Rome on Sunday that investors could now begin treating Italy as the next weak link in the eurozone.

By Dario Thuburn (AFP)

Published: Mon 11 Jun 2012, 11:30 PM

Last updated: Tue 7 Apr 2015, 12:24 PM

Those fears have been fuelled by a report from Moody’s ratings agency warning that Spain’s banking troubles could be “a major source of contagion” for Italy where lenders are also highly reliant on European Central Bank funding.

“Italy is now the only country in difficulty that has not had to ask for a bailout,” said Federico Fubini, a columnist for the top-selling Corriere della Sera daily, after aid packages for Greece, Ireland, Portugal and now Spain.

Without a stabilisation in borrowing costs on the debt markets for Italy and Spain and a Europe-wide agreement on the banking system, Fubini said that “the uncertainty will be very high and scrutiny of Italy will grow ever higher.”

Italy’s borrowing costs are lower than Spain’s — indicating greater investor confidence — but they have been moving in line with Spanish ones. The rate on benchmark 10-year Italian government bonds on Friday rose to 5.745 per cent, while the rate on Spanish bonds went up to 6.192 per cent.

Carlo Bastasin, writing in business daily Il Sole 24 Ore, was also wary on the Spanish deal, saying: “For Italy this represents the removal of the filter that separates our country from the group of other countries in difficulty.”

As has been the case in Spain, Italian banks have bought up large amounts of domestic government bonds in recent months, making up for reduced foreign demand but also increasing their exposure to the sovereign debt crisis.

The Corriere della Sera daily said concern about possible contagion drove Prime Minister Mario Monti, who is also the finance minister, to play a key role in negotiations leading up to the Spanish bank rescue announced on Saturday. “Monti lobbied for Spain not to be lumbered with an austerity plan like the ones for Greece, Ireland and Portugal,” the report said. A headline in the daily described the deal as a “move to stop the contagion.”

But Daniel Gros, head of the Centre for European Policy Studies in Brussels, warned: “After Spain, there will not be the margins to help Italy. It will be defenceless and forced to help itself if the situation deteriorates.”

“For the moment it is holding up. The bond auctions are going very well and the (primary) surplus is significant, but it needs to make more effort,” the economics expert said in an interview with La Stampa daily.

Italy’s banking system has proved resilient and has required no domestic or foreign bailouts since the financial crisis first broke in 2008, while several major banks have launched successful recapitalisations in recent months. Italian banks also lack the high property market risk of Spanish ones.