A European recession brought on by global leaders’ failure to stem the sovereign-debt crisis may spur Italy and other euro members to leave the 17-nation currency, according to Deutsche Bank AG’s Dominic Konstam.
“Do they want to go through a very deep recession almost imposed upon them by the failure to resolve this financial crisis?” Konstam, global head of rates research in New York, said in a Bloomberg Television interview on “Surveillance Midday” with Tom Keene. “Or are they going to be saying, ‘Look, we could go back to the way we used to be, which is where we had our own currency and were able to run more moderate interest rates and have strong growth.’ That’s the real challenge for Italy.”
Italian 10-year bond yields climbed to a euro-era record 6.68 percent on concern the region’s third-largest economy is struggling to manage its debt load. The euro fell for a second day versus the dollar, dropping 0.2 percent to $1.3762.
“They’re potentially going to be crossing that 7 percent threshold,” Konstam said of the yields. “The other countries that have needed bailouts went through the same thing. It’s looking remarkably similar. The difference is Italy is a massive bond market.”
The news agency Ansa said Prime Minister Silvio Berlusconi denied a report by Giuliano Ferrara, his former spokesman and editor of newspaper Il Foglio, who wrote today that the premier would step down “within hours.” Berlusconi will likely resign next week in return for support in a vote on austerity and economic-growth measures, Ferrara said in a phone interview after his initial report.
With almost 1.6 trillion euros ($2.2 trillion) of bonds outstanding, Italy has more liabilities than Spain, Portugal and Ireland combined, making it vulnerable to increases in borrowing costs. Berlusconi triggered the latest surge in yields after bowing to domestic demands to water down a 45.5 billion-euro austerity package.
“Anyone now possibly might leave the euro if things continue to deteriorate really badly,” Konstam said. “There’s a limit to how much austerity anyone is going to run.”
Italy’s borrowing costs rose even as the European Central Bank was said to be buying the nation’s debt. It settled 9.5 billion euros ($13.1 billion) of bond purchases in the week through Nov. 4, up from 4 billion euros the previous week, said the bank, without detailing which markets it bought in.
“The only thing that will save the monetary union will be if they can and will monetize the debts of the peripheral countries,” said Konstam, referring to the policy of printing money to buy outstanding bonds. “This isn’t going to be something that’s going to happen anytime soon, in the next few months. But over the next year or so, as Europe goes into recession, that’s going to be a big issue.”
To contact the editor responsible for this story: Dave Liedtka at firstname.lastname@example.org