Italy very likely to leave Eurozone.

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Posted on February 2, 2017 20:15 By Willem Cornax

The EU may be at war with everyone, it might soon have to demonise another nation. A recent report by Mediobanca shows the chance of Italy leaving the Eurozone increased every year. The reason? No real growth since joining the euro has investors increasingly on the fence about the sustainability of Italian participation in the euro.

The report suggests the increasing doubts are based on two aspects. First of all, it is noted that

“subdued GDP growth, limited structural reforms, deflation and lack of monetary sovereignty will continue to  represent challenges for Italy’s debt sustainability.

This means unless there is real growth in Italy and it can act on its own on monetary issues, the current levels of debt will remain or become more unsustainable.

GDP is the measure in money of the market value of all produced goods and services within a given period of time. This GDP “stayed flat in real terms between 1999 and 2015 whilst it contracted by 7% from 2008 to 2016,” the report states. In other words: there was no real economic growth in Italy during the past 18 years. This is important because, as long as it is accompanied by continual actual growth, debt is regarded as rather unproblematic. In Italy, however, this is clearly not the case.

A second problem noted in the report is the current ECB policy of Quantitative Easing (QE). This is the monthly buying program, creating an extra 80 billion euros per month in liquidities. The report acknowledges the initial benefits from it, but

“not even the cost of funding benefit from QE can be taken at face value: if, on the one side, we estimate a €20bn cost of funding benefit from 2013 (when QE expectations started to affect the yield curve), on the other, we calculate a cumulated €21bn negative impact of low rates on the MTM of public debt derivatives over the same period.”

MTM means Mark-to-Market. This term is used to describe the ‘fair value’ of a liability or asset based on the current market price. The liabilities, in this case, are the public debt derivatives. Since the market is appreciating these at a lower value, because of lack of growth and large public debt, the initial effects of QE by the ECB are nullified.

These two factors lead to the conclusion that within the next few years investors will see it become more likely that Italy will exit the Eurozone, or needs serious debt restructuring. However, the second option will add extra instability to a still fragile Eurozone. Maybe that’s why Mr. “No plan B” Draghi told Italy in late January 2017:

“If a country were to leave the Eurosystem, its national central bank’s claims on or liabilities to the ECB would need to be settled in full.”

Apparently, the integrity of the Eurozone is not as inevitable as he once deemed it to be.


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