The Fate Of The Euro Hinges On Italy. Italy's Looking Iffy.
By Edward I. Altman, Max L. Heine Professor of Finance
Will the Euro survive? We should know the answer within 12 months, perhaps sooner, but the odds against this happy ending are increasing with each piece of bad news about Italy’s economy and its fundamental components.
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.