Funding remains challenging for Italy without external support, Bank of America warns
High domestic savings and increasing political desire to push for spending cuts and debt reduction measures remain important factors that allow Italy to retain market access, but the country should qualify for a precautionary credit line, Bank of America Merrill Lynch (BAML) warned in its latest ‘Italy economic viewpoint’.
Ahead of the 2013 elections, economists at the bank expect redemptions to be particularly high in October, December and April, implying that funding challenges may prove significant without any form of external support from the European Central Bank.
“Italy should qualify for a precautionary credit, which would provide access to up to 10% of GDP support, with loose monitoring and no additional conditionality relative to the status quo,” the bank said.
Under these premises, BAML expects the government headed by Mario Monti to have the political backing to sign up already this fall.
The government will not necessarily draw down the money unless turbulence increases ahead of the elections or in the event of a halt of the Greek programme.
But the success of any external programme ultimately rests on whether or not the country endorses a reform plan, the bank added.
“In our view, a precautionary credit would provide the right balance of functioning as a backstop against excessive market turbulence and allowing the next government ownership of the reform agenda. It would not boost growth right away, but would help the reform process, which benefits growth and debt sustainability,” the research said.
Moreover, the alternative would create a worse scenario.
“A hard programme would probably decrease reform appetites, strengthen the trade unions and do nothing to stop euro disillusionment. As a result, it would neither benefit growth nor support a turnaround in non-resident appetite for local bonds,” BAML said.