Italy May Be Past ‘Point of No Return,’ Barclays Analysts Say

Italy may be “beyond the point of no return” in becoming the next victim of Europe’s debt crisis even if the government implements promised austerity measures to reduce debt, Barclays Capital analysts say.

“Once set in motion, these self-reinforcing negative dynamics are very difficult to break,” analysts Michael Gavin, Piero Ghezzi and Antonio Garcia Pascual wrote in an e-mailed note late yesterday. “Prompt and effective policy action from Rome may be necessary to remove Italy from the downward spiral that threatens it, but we doubt that is sufficient.”

Italian borrowing costs have risen to euro-era highs this week on concern the country will not quickly implement austerity and growth steps needed to rein in its 1.9 trillion-euro ($2.6 trillion) debt, the world’s fourth biggest. Prime Minister Silvio Berlusconi faces a budget vote in Parliament today that may show he doesn’t have the majority to stay in power and push through the measures promised to the European Union.

The yield on Italy’s 10-year bond fell 5 basis points to 6.6 percent at 12:20 p.m. in Rome after rising as high as 6.75 percent in earlier trading. That’s close to the 7 percent level that forced Greece, Ireland and Portugal to seek bailouts.

While the Barclays analysts said they’re “confident that political roadblocks will be cleared” and reforms of some kind implemented by whomever is in power in Italy, that may not be enough to stabilize market dynamics. “The extensive historical record of similarly situated countries suggests to us that the answer is no,” they wrote.

Europe’s rescue fund, the European Financial Stability Facility, is still not “an adequate safety net” and there’s “little practical alternative to a strengthened commitment” by the European Central Bank “to act as lender of last resort,” they said.

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