(Updated euro, European futures in sixth paragraph. For more on debt crisis, TOP CRIS)
June 11 (Bloomberg) — The 100 billion-euro ($126 billion) rescue for Spain’s banks moves Italy to the frontline of Europe’s debt crisis, putting pressure on Mario Monti’s unelected government to avoid succumbing to a market rout.
“The scrutiny of Italy is high and certainly will not dissipate after the deal with Spain,” Nicola Marinelli, who oversees $153 million at Glendevon King Asset Management in London, said in an interview. “This bailout does not mean that Italy will be under attack, but it means that investors will pay attention to every bit of information before deciding to buy or to sell Italian bonds.”
Italy has more than 2 trillion euros of debt, more as a share of its economy than any advanced economy after Greece and Japan. The Treasury has to sell more than 35 billion of bonds and bills per month — more than the annual GDP of each of the three smallest euro members, Cyprus, Estonia and Malta.
Spanish Economy Minister Luis de Guindos said on June 9 that he would request as much as 100 billion euros in emergency loans from the euro area to shore up a banking system hobbled by more than 180 billion euros of bad assets. Mounting concern about the state of Spain’s banks and public finances drove the country’s borrowing costs to near euro-era records last month, dragging up Italian rates in the process.
“The problem for Italy is that where Spain goes, there’s always the perception that Italy could follow,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London said in an interview. “There is insufficient differentiation within the financial markets. It is clear as the light of day and has been that Spain’s fundamentals are a lot direr than Italy’s. That hasn’t stopped Italy suffering from Spanish contagion.”
The euro advanced today after the weekend rescue for Spain’s banks, with the currency up 0.9 percent at $1.2629 as of 7:12 a.m. in London. Stocks also rallied, with the MSCI Asia Pacific Index gaining 1.9 percent. European shares may open higher with futures on the Euro Stoxx 50 gaining 2.4 percent to 2194 at 7:15 a.m. in London.
Italy is on track to bring its budget deficit within the European Union limit of 3 percent of GDP this year and the country is already running a surplus before interest payments, meaning its debt will soon peak at about 120 percent of GDP. The jobless rate is less than half of Spain’s 24 percent, and Italy didn’t suffer a real estate bust, leaving its banks healthy by southern European standards. The budget deficit at 3.9 percent of GDP last year, is less than half that of Spain.