Eurozone contagion builds, as Italy seeks solutions

The continued rapid escalation of the euro area sovereign and banking credit crisis is threatening the credit standing of all European sovereigns, says Moody’s Investors Service in a note.

The news comes as the International Monetary Fund is reported in the Italian media on Sunday (27 November) to be preparing a €600 billion assistance package for Italy, in return for another round of austerity and structural adjustment measures.

Across the Eurozone, Moody’s says, the situation has worsened. “The probability of multiple defaults (in addition to Greece’s private sector involvement programme) by euro area countries is no longer negligible,” the agency says.

In Moody’s view, the longer the liquidity crisis continues, the more rapidly the probability of defaults will continue to rise. EU leaders are failing to act quickly to restore market confidence, at a time when the situation is fluid and fast-moving. 

A series of defaults would also significantly increase the likelihood of one or more members leaving the euro area. In turn, this would have negative repercussions for the credit standing of all euro area and EU sovereigns.

The absence of major policy initiatives to stabilise credit market conditions will likely mean is prompting Moody’s to reposition the overall architecture of its ratings within the euro area, and possibly elsewhere within the EU. Moody’s expects to complete such a repositioning during the first quarter of 2012.

ECB member and Bank of France governor Christian Noyer, speaking in Tokyo, said: “Italy should not be considered a weak economy. A break-up of the euro zone is out of the question. There is no plan B.”

The IMF has denied claims that Italy has asked for funding. A spokesman said: “There are no discussions with the Italian authorities on a programme for IMF financing.” The EU has also denied claims that Italy has asked the European Commission for assistance. The EU spokesman said, however, that any assistance for Italy would be within the context of a Eurozone-wide scheme designed to buttress the Eurozone.

According to the Italian newspaper La Stampa, a range of options is being considered, including the IMF providing funding to Rome at rates of between four and five percent, considerably lower than the seven percent rates forced upon Italian government borrowing in recent days.

The eurozone’s own bail-out fund, the European Financial Stability Facility, can only provide loan guarantees of up to €440 billion, and some €230 billion of that sum has already been spoken for by Greece’s rescue package.

After a meeting last Friday, between the new Italian prime minister Mario Monti and French President Nicolas Sarkozy and German Chancellor Angela Merkel, Rome issued a statement repeating the claim already made by Angela Merkel: “A collapse of Italy would inevitably be the end of the euro.”

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