Markets Dull to Dire Threat of Contagion
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (TheStreet) -- Just a couple of weeks ago, with the supposed "solution" to the Greek crisis, many market participants thought that the politicians had bought at least several months of relief from the European debt crisis. But just as the markets attacked the stocks of both Morgan Stanley and Goldman Sachs after the failure of Lehman, it should have been expected that the markets would go for the European Monetary Union's jugular, Italy. And, it didn't take long.
Too Big to Bail
Logically, Italy's debt was always going to be the issue that determined the EMU's fate. That is because Italy's sovereign debt outstanding is over 1.6 trillion euros (compared to 345 billion euros for Greece, and 150 billion euros for both Portugal and Ireland), its debt/GDP ratio is a punishing 120%, and its estimated annual funding needs will run at roughly 250 billion euros.
That annual funding need is larger than the other European PIIGS (Portugal, Ireland, Greece and Spain) combined. Because the remaining capacity of the European Financial Stability Facility is just 320 billion euros, it is not big enough to finance Italy's borrowing needs for more than a year, much less deal with Ireland, Portugal and Spain. Thus, Noruma Securities had dubbed Italy as "Too Big to Bail."In the end, it would be up to Germany and France, the two biggest economic powers in the EMU, to save Italy, the third biggest economy. That would require a commitment of more than 500 billion euros, or about 10% of their combined economies, a figure that is probably not politically doable.
NonchalanceWhile there appears to be some concern in the financial markets about the European debt issues, the markets appear nonchalant about it. The "contagion" so far appears to be limited to some of Europe's banks and to the markets for PIIGS debt. For example, the VIX for U.S. equities is barely off its lows. Our belief is that this situation is much more serious than embodied in the current market reaction, and the "contagion" could easily spread worldwide:
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