Spain has no option to avoid a bailout, Italy does, Italian economist warns

While Spain is set to turn to the European Financial Stability Facility (EFSF) for a formal bailout subject to stringent conditionality, to avoid the same bailout request Italy should reduce its borrowing needs with a determined programme of public asset sales and bridge financing from the Cassa Depositi e Prestiti, according to Francesco Giavazzi, economist and adviser to the government headed by Mario Monti.

“Spain has no options, but Italy does. Italy is different; Italy should not bow to the EFSF and submit itself to its conditionality in order to persuade the ECB to buy its bonds,” Giavazzi warned today in a paper.

Italy can and should avoid engaging with the EFSF for two reasons, said the economist.

First, Italy’s economic situation is very different from Spain’s and the country did not suffer from a real estate bubble.

“Italian banks are weakened by the recession but their balance sheets do not bear the legacy of piles of mortgages gone sour. At 123% of GDP, public debt is extremely high, but the government runs a primary surplus, 3.4% of GDP this year, while Spain has a primary deficits of 3.3%,” Giavazzi said.

According to the economist, if Italians were to swap their foreign assets with the government bonds held abroad, Italy would look like Japan: a high-debt country but one in which all of the debt is held domestically.

Second, Italy’s technocratic government owes its legitimacy to its ability to steer the country through stormy times, something its politicians proved unable to do.

“The technocrats’ legitimacy would vanish the day they admitted they need outside surveillance. When that happens, an early election would be inevitable with the likely result being a hung Parliament,” Giavazzi said.

When Spain will knock on the EFSF’s door, Italian bonds will be under renewed pressure. According to Giavazzi, to survive while renouncing to outside help Monti will need a plan.

“The government still owns large fractions of publicly traded companies, among them Enel, Eni and Finmeccanica. It should sell them. There is also a huge stock of public real estate, admittedly harder but not impossible to sell: the city centres of most Italian towns have at least a couple of large, empty army barracks,” he warned.

After the large privatisation program of the 1990s Italy has been reluctant to dispose of any of its government-owned assets, but the stigma attached to asking for outside help may provide the incentive to start selling, which so far has been lacking.

“None of this would solve Italy’s underlying weakness stemming from a decade of weak growth. But it would give the country a period of relative calm which Parliament could use to sort out the electoral law and Monti could use to give new impetus to his government,” Giavazzi said.

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