Barclays Capital: At this point, Italy may be beyond the point of no return (10y-yield>7.3%)

-The ongoing debt crisis in Greece is a legitimate concern for policymakers and
investors, but growing concerns about Italy pose the real danger to Europe and
the world economy. Yields on Italian government debt have reached new highs,
and are at levels that we consider clearly unsustainable.
-We believe that policy reforms in Italy are necessary to increase confidence in
the Italian credit. However, historical experience suggests that the selfreinforcing
negative market dynamics that now threaten Italy are very difficult
to break. At this point, Italy may be beyond the point of no return. While reform
may be necessary, we doubt that Italian economic reforms alone will be
sufficient to rehabilitate the Italian credit and eliminate the possibility of a
debilitating confidence crisis that could overwhelm the positive effects of a
reform agenda, however well conceived and implemented.
- While it is a step in the right direction, we believe that the EFSF is not an
adequate safety net to insulate countries like Italy from contagion, and shortcircuit
‘vicious circle’ market dynamics that could overwhelm countries’ efforts
to adjust and reform. Foreign governments and the IMF could provide cash but
not credit. We see little practical alternative to a strengthened commitment by
the ECB to act as lender of last resort to precariously positioned eurozone


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