Or maybe not? It appears that Italy is today’s problem child in the Eurozone as yields on 10 year Italian government bond widened out another 10 bps to 5.27% this morning.
The problems in Italy are twofold. It is highly likely that Economy Minister Tremonti, the object of Berlusconi’s recent scorn (and who is now “tainted” with ties to Marco Milanese corruption scandal), is on the way out. Tremonti is widely credited with a great deal of the cost cutting achieved across government. But the bigger issue involves the financial sector and in particular its exposure to Greek debt. Check out the chart of one of Italy’s largest banks (Unicredito):
Source: Bloomberg, 2011
The same challenges face the largest insurer Generali. If you recall we highlighted Dexia in earlier posts as a “bellwether” of sorts for European banking problems – today it was downgraded by Moody’s. Which brings us to a big difference between the banking systems in Europe and the US. In Europe, over 2/3rd’s of the funding for activity comes from the banks with the balance coming from the stock/bond markets. In the US, it is almost the complete opposite. Consequently, as Peter Zeihan of Stratfor notes, European banks are encouraged to keep the capital “at home” and serve the national interest i.e. not necessarily a pure profit motive. As a result, banks are expected to support not only national but now pan-European goals - including problems such as Greece. As everyone knows, European banks need to raise more capital. But capital expects a return – not to support a cause. With the “stress tests” now due out on July 15th expect volatility to continue.