Standard & Poor’s analyst Moritz Kraemer said Italy is the country most under scrutiny by policy makers as its financing needs are larger than the support available from Europe’s crisis-fighting resources.
“The country that is most in the eye of the attention of policy makers has to be Italy,” Kraemer said at the Sovereign Debt Conference hosted by Bloomberg Link in Frankfurt today. That is “simply because of its very large financing requirements” which are, “with the current toolbox of safety nets that we have in Europe, beyond credible support.”
European Union officials have injected billions of euros to keep Greece afloat to prevent crisis contagion from spreading to larger euro-area countries such as Spain or Italy. The International Monetary Fund warned in a March 16 report that the Greek bailout held “exceptional risks” that could prompt a “disorderly” exit from monetary union unless additional help is prepared.
Kraemer said that while countries such as Cyprus and Portugal are no longer investment grade, and are therefore most at risk, because of their small size their problems “should not necessarily bring about a euro-zone wide calamity.”
He also said that the success of measures such as the European Central Bank’s (EURR002W) three-year provision of cash to euro- region lenders must not lead to complacency among policy makers.
“The job is not done,” Kraemer said. “I think the biggest mistake would be to fall into the trap of complacency.”
“What is needed is time, but what matters is what you make with the time that you gain,” he said. “Maybe the success of bringing yields down again has been too wide and too fast because it could discourage policy makers from continuing on the path of reform.”
Kraemer, speaking later in an interview on Bloomberg Television, said Portugal may succeed in avoiding a debt restructuring.
“Portugal in our view has the weakest credit in the euro zone other than Greece, which has to do with some of the structural challenges they’re facing,” he said. “But compared to Greece the debt is not as high. The implementation capacity for policy reform, the institutions in Portugal are much stronger than in Greece so I think they have a good fighting chance.”
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