The risk of Italy defaulting on its debt is very low but it cannot be completely ruled out, said Pimco’s global fixed income chief Andrew Balls on Wednesday.
“Italian sovereign default is unlikely but not impossible. A formal default is very unlikely. However, the most plausible scenario is the combination of issuing a parallel currency or even redenomination to the Italian lira.
“California issued a parallel currency after 2008 so given it happened there, it should not be ruled out in Italy.”
Balls also warned of the possibility of Italy loosing market access. According the manager, fiscal policy’s plans and QE explain partly the current situation in the country.
“Given the levels of spread offered in Italy were not enough attractive to take risk, we were clever enough to avoid so,” Balls commented.
He continued: “We think it makes sense to be underweight European credit in general in case of a full-blown crisis in Europe. European risk assets might be affected if the situation in Italy worsen.”
An Italian default would have a negative impact on the nation’s bond and stock markets, possibly triggering regional contagion and sparking fears of another eurozone debt crisis.