Tags: spain | italy | crisis | europe

All Eyes on Spanish Crisis Now but Italy Lurks on Horizon

Friday, 08 Jun 2012 06:20 PM

By Jacob Wolinsky

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Once again, the European sovereign debt crisis has stolen the global economic spotlight.

Since the crisis started more than two years ago, traders have gone through periods of extreme optimism to despair, thinking the world is going to end.

The traders would breathe a sigh of relief every time Europe announced some plan, only to be frightened once the plan didn't work. Famous investor David Einhorn included a humorous chart of this cycle in a letter to investors several months ago.

However, now it certainly does appear that Europe is on the verge of collapse.

Spain is trying to figure out a way to recapitalize its largest bank, Bankia. Spain, with a 25 percent unemployment rate, is running out of money, as investors dump Spanish bonds. Spain is the fourth largest economy in Europe.

The market breathed a sigh of relief as it appeared that Germany was ready to agree to a plan to aid Spain and the rest of Europe.

Whether this plan will happen remains to be seen. However, there was something truly odd about the panic in Europe.

Several months ago, the markets started to worry about Spain and Italy.

Traders dumped bonds issued by both countries, and Europe acted again to "solve" the crisis. This time around, Italy has been almost entirely out of the news.

Nothing has happened in the past few months which has made the Italian economy any stronger. Italy has close to double the GDP-to-debt levels of Spain. The mafia in Italy has more money than any of the country’s banks.

Italy is currently in a recession as GDP in the country is now in negative territory. Despite the panic over Spanish bonds, Italian bonds are also getting hit. There was a further selloff of Italian bonds after Moody’s downgraded a large number of banks.

Why is Italy totally out of the media’s attention, while the focus is almost entirely on Spain? After asking many experts on the crisis, none could give a real solid answer.

I believe this is typical of the entire European cycle as described. The market isn't rationale, and right now isn't focused on Italy. Eventually that will change due to some big news out of Italy or boredom of the Spanish crisis.

The European crisis is still far from over. No matter what the outcome, the continent will likely not resume strong growth any time in the near future.

However, investors shouldn't be surprised when Italy, the third largest economy in Europe, comes into the spotlight. What will happen is unknown, but Italy will be just as large of a problem as Spain.

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