Opinion
The Fate Of The Euro Hinges On Italy. Italy's Looking Iffy.
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By Edward I. Altman, Max L. Heine Professor of Finance
One year ago, I wrote about the European debt crisis and predicted that Italy would be either the hero or villain of the Euro. I felt then, as I do now, that the escalation of the crisis would come down to whether one of the key Southern European countries would be able to survive, without a bailout, the onslaught of a capital market “attack.” Based on the inherent strengths of its fundamental competitive and wealth attributes, I concluded that Italy would be the “fulcrum country,” with a 70% chance to emerge successfully, enabling the Euro itself to survive. Since the end of 2010, unfortunately, Italy’s fundamentals have deteriorated dramatically, its economy is in a double-dip recession, unemployment is over 10%, and even top European politicians are now saying that the Euro’s survival is at the critical stage. My current assessment is that Italy’s, and also the Euro’s, solvency is at best a 50-50 probability, notwithstanding the announced change in EU policy toward pumping €130 billion of fiscal stimuli into the most vulnerable European nations and steps toward a financial and political union.
My increased pessimism is based on our “bottom-up” approach toward assessing the health of any sovereign. Recently, Professor Herbert Rijken of the Free University of Amsterdam and I began suggesting that financial and political analysts should not focus solely on the traditional macroeconomic metrics like Debt/GDP or Deficits/GDP, but also to monitor the health of the sovereign based on the condition of its private sector – both its non-financial corporate sector and its privately owned banks. After all, if the corporate sector is healthy, it can pay more taxes from profits and hire more workers, as well as provide vital new investments. On the other hand, if a significant proportion of a sovereign’s private sector is on the verge of financial distress and bankruptcy, or needs increased capital itself, it cannot hope to contribute much, particularly if companies are asked to increase tax payments.
Read full article as published in Forbes.
My increased pessimism is based on our “bottom-up” approach toward assessing the health of any sovereign. Recently, Professor Herbert Rijken of the Free University of Amsterdam and I began suggesting that financial and political analysts should not focus solely on the traditional macroeconomic metrics like Debt/GDP or Deficits/GDP, but also to monitor the health of the sovereign based on the condition of its private sector – both its non-financial corporate sector and its privately owned banks. After all, if the corporate sector is healthy, it can pay more taxes from profits and hire more workers, as well as provide vital new investments. On the other hand, if a significant proportion of a sovereign’s private sector is on the verge of financial distress and bankruptcy, or needs increased capital itself, it cannot hope to contribute much, particularly if companies are asked to increase tax payments.
Read full article as published in Forbes.