Keep Debt Crisis Eyes on Italy and India

By: Ashvin_Pandurangi

When we talk about economies that are looking horrendous these days, it is important to remember that there are other economies out there looking just as bad or worse, either right now or in the near future. The reason is because the global economy is so damn inter-connected that no large national economy can sustain any modicum of growth on its own. This fact is obviously the most apparent in a region such as the Eurozone, which forms a common market and shares a common currency.

Most of the focus is now falling on Spain after it announced that it will indeed need a massive European bailout for its banking sector, in unsurprising contradiction to what Mariano Rajoy stated just a month or so earlier, but soon it will also be Italy in the cross hairs once again. Andrew Davis and Nadine Skoczylas report for Bloomberg:

Italy Moves Into Debt-Crisis Crosshairs After Spain

The 100 billion-euro ($126 billion) rescue for Spain's banks moved Italy to the front line of Europe's debt crisis as an initial rally in the country's bonds fizzled on concern it may be the next to succumb.

Italy's 10-year bonds reversed early gains today in the first trading after the Spanish bailout and fell for a fourth day, sending the yield up 20 basis points to 5.98 percent.

"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 2 trillion euros of debt, more as a share of its economy than any developed nation other than Greece and Japan. The Treasury has to sell more than 35 billion euros of bonds and bills per month -- more than the annual output of each of the three smallest euro members, Cyprus, Estonia and Malta.

"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."

...

Italy's total debt of more than twice Spain's has given investors pause, especially in a country where economic growth has lagged the EU average for more than a decade. The euro region's third-biggest economy, Italy is set to contract 1.7 percent this year, more than the 1.6 percent in Spain, the Organization for Economic Cooperation and Development estimates.

...

Debt agency head Maria Cannata last week said that fewer foreign investors were turning up at Italian auctions in recent months and that the country could still finance at yields as high as 8 percent.

The exodus of foreign buyers has left the Treasury more dependent on Italian banks, which in turn have been among the biggest borrowers in the European Central Bank's three-year lending operations. Italy returns to markets before Spain does, selling as much 6.5 billion euros of treasury bills on June 13, followed by a bond auction the next day.

"If Italy has a problem with accessing the markets because investors lose confidence in the Italian ability to do the right thing, the ECB will be drawn into the fire," Thomas Mayer, an economic adviser to Deutsche Bank AG, said in a telephone interview. "That could pose a potentially lethal threat to European monetary union."

Once Italy is dragged back into this epic struggle with full force, one of the only remaining questions will be how long before France becomes a full-fledged member of the drowning Euro periphery. Given the potential speed of financial contagion at this point, and the firm policy divide between Francois Hollande and Angela Merkel, it may not be long at all. On the other side of the world, we have India creeping into the focus of the markets, as China's smaller cousin gets some well-deserved recognition.

It may be smaller, but it is faces all of the same financial, export, inflation and sociopolitical woes as China and it is arguably deteriorating at a much faster pace. India is a very critical economy for people to keep an eye on in upcoming months, as it will have severe implications for global investment and trade flows, as well as the social fabric of the massive Indian populace. Kartik Goyal reporting for Bloomberg: 

S&P Says India May Be First BRIC Nation to Lose Investment Grade

India may become the first BRIC nation to lose its investment-grade credit rating, Standard & Poor's said, citing slowing growth and political roadblocks to economic policy making.

"Setbacks or reversals in India's path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality," Joydeep Mukherji, an analyst at Standard & Poor's in New York, said in a statement today.

Indian gross domestic product rose 5.3 percent last quarter from a year earlier, the weakest pace in nine years, stoking concern the nation's economic prospects have deteriorated as policy gridlock deters investment and Europe's debt crisis crimps exports. S&P lowered India's credit outlook to negative from stable in April, dealing a further blow to Prime Minister Manmohan Singh's development agenda.

The rupee and the stocks dropped. The rupee fell 0.6 percent to 55.78 per dollar at 3:20 p.m. local time, while the BSE India Sensitive Index declined 0.5 percent. The yield on the 8.79 percent note due November 2021 declined two basis points, or 0.02 percentage point, to 8.33 percent.

S&P's long-term sovereign credit rating on India is BBB-, one level above speculative grade. Aside from India, the BRIC group also includes Brazil, Russia and China.

"Fiscal slippage, combined with persistently high inflation, could further weaken investor confidence," S&P said in a linked report. "Both the government's debt burden and fiscal flexibility could continue to erode, in step with rising external vulnerability because of higher trade and current account deficits. India's credit quality would suffer under such a scenario, and a downgrade could result."

Prime Minister Manmohan Singh's government is facing one of its most challenging periods since taking office in 2004. The administration is grappling with a trade deficit that reached a record $184.9 billion in the fiscal year ended March, the widest BRIC budget shortfall and an inflation rate of more than 7 percent.

Ashvin Pandurangi, third year law student at George Mason University
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

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