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Italy Next, Austrian Minister Says

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Mere days after Spain received a bailout deal, wary investors and some eurozone officials turned their attention to Italy, proving that contagion fears are far from soothed. Others were more sanguine about the situation, or perhaps had more faith, as Fitch Ratings said it was unlikely that Italy would need its own rescue.

Italy’s industry minister has said that the Italian government had put in place reforms that had bolstered the country’s economy and that Rome had no need to look for outside assistance. But Finance Minister Maria Fekter of Austria on Monday said that was not the case, Reuters reported.

The minister said that Italy could be the next in line for a bailout. “Italy has to work its way out of its economic dilemma of very high deficits and debt, but of course it may be that—given the high rates Italy pays to refinance on markets—they too will need support,” Fekter said in a television interview quoted by Reuters. On Tuesday, Fekter backtracked to say that she had no indication that Italy was considering any such action.

Fekter is not the only eurozone official to see problems on the horizon for Italy. Lars Feld, who sits on the German government’s council of economic advisors, was quoted saying, “Overcoming the troubles in Spain will bring calm to the markets for a while, but the chances are not so small that Italy may also come under fire, in particular as the promised labor market reform has turned out to be less ambitious.”

And it isn’t just eurozone officials who fear potential fiscal woes for Italy. Observing the increase in Italian bond yields, Brenda Kelly, senior market strategist at CMC Markets in London, was quoted saying, “We’re looking at a major problem possibly for Italy, with its bond yields climbing above 6% for the first time in quite a long period of time.”

She added, “It being the third largest economy [in Europe], it does actually set the scene that the contagion effect can’t necessarily be contained to Spain.”

Reflecting the mood of many, Darren Sinden, senior sales trader at Silverwind Securities, said in the report, “Spain’s problems are not fully solved, and there are concerns of contagion to Italy. And then we have got the wild card of the Greek elections.”

However, Ed Parker, managing director of Fitch Ratings, disagreed—at least for now—with the assessment on Italy, saying in a Bloomberg report that Italy was unlikely to need help from outside in managing its finances. “Italy is much closer to getting to a sustainable macroeconomic position,” Parker was quoted saying Tuesday. “It is now running a pretty small budget deficit, has a much lower current account deficit, doesn’t have these problems in the banking sector.” Parker did concede, though, that “Italy does have high levels of government debt so there is very little headroom there to absorb any further negative shocks.” He added, “It is very dependent on the interest rate at which it can borrow, which is high, higher than its growth rate, and so it is in this situation where the market interest rate has self-fulfilling impacts on Italy’s credit worthiness.”

Even ratings agencies are not in full agreement on the situation in the eurozone. Prior to the announcement of the Spanish bailout, Moody’s had said Friday that it might review the ratings of several eurozone countries because of events in Spain and Greece. “As Spain moves closer to the need for direct external support from its European partners, the increased risk to the country’s creditors may prompt further rating actions,” Moody’s said in a statement.

Fitch itself said all eurozone countries could see their ratings fall because policymakers have so far failed to end the debt crisis. It also said Spain would “significantly” miss its debt targets.

Parker added that Fitch’s main scenario is for Italy not to need external help. “If interest rates are lower, then Italy, after this year, won’t have to do a lot more fiscal consolidation,” he was quoted saying. “Its budget deficit is already low and its government debt will be on a path of stabilization and decline.”