Focus on southern Europe – pros and cons of Italy’s Euro exit

As if he didn’t have a big enough problem juggling Italy’s financial crisis, prime minister Mario Monti now also has to deal with the financial crisis reaching critical point at regional and city level too.

Foremost among these is the financial plight of Sicily, an autonomous region that by some accounts is fast heading for a default. But the real problem for Monti is that its problems are replicated up and down the country.

According to La Stampa, ten major cities in Italy are close to defaulting, reflecting a country-wide reality. In such an event, the city council would be dissolved and the city would pass under the administration of appointed officials, like Monti himself.

Sicily has outstanding loans and debt of about €5bn ($6.11bn), part of Italy’s overall debt of €2trn. Italian local authorities have long-term debt and loans of €115bn, of which about €50bn is issued by the regions. Fitch rates Sicily at BBB+ with negative outlook, one notch below the agency’s rating for the sovereign debt of Italy. Yields on Italian 10-year bonds stand at 6.34%, which analysts say is sustainable for the time being.

Last week, Monti wrote a letter to Sicily’s governor Raffaele Lombardo asking him to confirm he would resign by the end of the month. Monti’s own threat of a resignation over Merkel’s handling of the crisis at European level proved to be an empty one, but on Lombardo Monti means business. His removal would enable Monti to “deploy the most efficient and appropriate instruments” to deal with the crisis, though it was not clear what those instruments would be or how they would be financed, given the Italian state’s own precarious financial position.

A potential default by Sicily and other regions would further weaken Italy’s ability to meet its own and other international financial commitments, raising the admittedly theoretical question of whether Italy would be better off outside the Eurozone.

Analysts at Bank of America Merrill Lynch have analysed the potential impact of such an event, and concluded that Italy, along with Ireland, is the country that stands to gain the most from leaving the Eurozone voluntarily. 

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