Italian central bank governor Ignazio Visco told Italian newspaper La Stampa that Italy will navigate through the storm without assistance of the ECB and its Outright Monetary Transactions or OMT’s. While he admits that the next few months will pose quite a challenge for Italy, the world’s third largest debtor nation, he believes that Italy witnessed the height of the debt contagion.
Italy is in the midst of a recession and hammered by political uncertainty after Mario Monti announced his resignation and Silvio Berlusconi announced his comeback plans. The ECB as well as Brussels is extremely worried about developments in Italy as it writes the next chapter of the Eurozone debt contagion.
Market participants around the globe have waited for the ECB to announce a giant plan in order to protect the single currency union and fight the debt contagion. After over 30 months and countless meetings the ECB and politicians in Brussels announced the OMT program which is designed to assist countries in deep financial distress, or at least that is what the ECB wants to believe.
The terms and conditions the ECB applies to applicants for the OMT are simply not worth it to beg for assistance as they are tight to extreme austerity measures which will plunge the recipient into a multi-year recession and stir social unrest. Greece knows too well what happens when you sleep with the devil.
Borrowing costs for Italy soared in November of 2011, but Visco said that the Italian central bank as well as austerity measures imposed by Monti has helped to reduce borrowing costs to levels Italy can handle. The ECB as well as Brussels were pleased after Monti replaced Berlusconi as he is open to austerity despite public hatred towards those measures.
As a result borrowing costs have declined, but at the price of the Italian population. Italians are fed up with austerity measures or even austerity prospects which marked the fall of Monti and the resurrection of Berlusconi to the political scene. His party withdrew support for Monti’s government which forced his resignation. Berlusconi and his Freedom Party are likely to reach out to former coalition parnters, the Northern League, and regain control over Italy.
News of Monti’s resignation have rattled markets and send borrowing costs higher once again for Italy as Berlusconi vowed to roll-back austerity measures imposed on Italians by Monti. Berlusconi wants to do what’s right for Italy in the long-term and under no circumstances allow austerity measures to keep Italy in a recession.
The ECB has created the OMT, but no sane government will ever ask for it as they do not want central bankers out of Frankfurt and politicians in Brussels to make decisions for them and throw their country into a recession while social unrest and riots as well as general strikes will paralyze the country on a daily base.
The Eurozone needs to undergo structural changes and until a dual Euro will be created the problems will not be resolved. A Euro North as well as Euro South is the only sophisticated solution to the problem and Italy under Berlusconi is one step into the smart direction.
