Fitch says Italy is where battle for euro will be won – or lost

If you want to watch the battle for the euro, forget Brussels or even Frankfurt. Turn your eyes instead to the Colosseum, the home of countless battles already, suggests Fitch.

“The future of the euro will be decided at the gates of Rome,” according to the ratings agency, which said today the embattled country was “the frontline of the crisis”.

Fitch has Italy rated A+ on negative watch, but predicted the country would hold together and would avoid defaulting on sovereign debt.

In an audience vote at Fitch’s London event, about 44% disagreed, and said Italy would need a rescue package, but it would prove too expensive and restructuring would follow.

Panelist Erik Nielsen, UniCredit’s head of economics and fixed income, said: “If Italy has to restructure you will have US dollar / euro parity. There is not a chance in hell they will have to restructure.”

He noted Italy’s 2011 export growth to November was about double Great Britain’s, “showing things are adjusting, yet it is stunning people have a whole set of pre-set conditions in their minds that then sidetracks their analysis. If people say there is a significant risk of a downgrade it becomes a self-fulfilling prophecy. There is clearly a buyers’ strike out there, and no-one wants to be the first.”

David Riley, Fitch’s head of global sovereign ratings, said: “We have a situation now where as Italian bonds get cheaper you have very few buyers. That is because as spreads widen it validates the concerns of those who believe Italy is insolvent.

“Spreads over 400bps cannot be afforded by Italy, they can be sustained for only a period of time. The concern we have is not only Italy is too big to fail, but is it too big to save? It is difficult to foresee a rescue package big enough to save it.”

Both UniCredit’s Nielsen and Chris Iggo, fixed income chief investment officer at Axa Investment Managers, called for larger intervention in markets by the European Central Bank, “which can break the psychology” of buyers on strike.

Iggo said Italian sovereign yields would be above even 10% “if people really thought Italy was finished”.

Instead, he said, investors are holding off lending to Rome because they perceive problems marking to market – as Europe’s Banking Authority insists – over the coming two months.

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