Euro area debt crisis took a dangerous turn, threatening Italy, the third economy in the region, which is too large to be saved with the financial instruments currently available to the European Union.
The longer the decision is deferred on Greece, the greater the risk that events will spiral out of control in this country and on the capital markets, which will impose radical and politically difficult measures for the maintaining of the unity of the euro zone.
The alternatives would be a closer union or a possible break-up of the euro area.
The solutions proposed by Germany, such as the issuance of common bonds of euro area and a possible bonds exchange of Greece, Portugal and Ireland with these new tools will return in question with a new sense of urgency.”We continue to believe that the more powerful states in Europe will provide financial support for the peripheral ones, because otherwise the cost would be double”, reads a note from Credit Suisse bank analysts.
Finance ministers from the euro area, divided on the involvement of private investors in the second bailout of Greece, failed Monday night to make a decision.
Officials have accepted, in exchange, for the first time, the possibility of some form of default (bankruptcy) of Greece, despite warnings of European Central Bank about the risks involved.
IMF Managing Director, Christine Lagarde, said that the Fund and European leaders are not ready to begin discussions on the second program for Greece.
Italy has been affected both by domestic political instability and of financial speculations surrounding the possible disintegration of the euro area, showed Credit Suisse analysts.
Investors began to liquidate investments in Italian stocks and bonds last week for fear that Prime Minister Silvio Berlusconi will try to remove the finance minister, Giulio Tremonti, considered a guarantor of fiscal prudence.
Italy’s borrowing needs for the next three years is over 600 billion euros, while the European rescue fund is 450 billion, and some financial assistance was already committed to Greece, Portugal and Ireland.
Analysts believe that Europe should increase the fund four times, if they want to support Italy.