The European economic crisis has taken different forms in different places, and Cyprus is the latest country to face the prospect of financial ruin. Overextended banks in Cyprus are teetering on the brink of failure for issuing loans they cannot repay, which has prompted the tiny Mediterranean country, a member of the European Union, to turn to Brussels for help. Late Sunday, the European Union and Cypriot president announced new terms for a bailout that would provide the infusion of cash necessary to prevent bankruptcies in Cyprus' banking sector and, more important, prevent a banking panic from spreading to the rest of Europe.
What makes this crisis different from the previous bailouts for Greece, Ireland or elsewhere are the conditions Brussels has attached for its assistance. Due to circumstances unique to Cyprus, namely the questionable origin of a large chunk of the deposits in its now-stricken banking sector and that sector's small size relative to the overall European economy, the European Union, led by Germany, has taken a harder line with the country. Cyprus has few sources of capital besides its capacity as a banking shelter, so Brussels required that the country raise part of the necessary funds from its own banking sector -- possibly by seizing money from certain bank deposits and putting it toward the bailout fund. The proposal has not yet been approved, but if enacted it would undermine a formerly sacred principle of banking in most industrial nations -- the security of deposits -- setting a new and possibly destabilizing precedent in Europe.
Cyprus' Dilemma
For years before the crisis, Cyprus promoted itself as an offshore financial center by creating a tax structure and banking rules that made depositing money in the country attractive to foreigners. As a result, Cyprus' financial sector grew to dwarf the rest of the Cypriot economy, accounting for about eight times the country's annual gross domestic product and employing a substantial portion of the nation's work force. A side effect of this strategy, however, was that if the financial sector experienced problems, the rest of the domestic economy would not be big enough to stabilize the banks without outside help.
Europe's economic crisis spawned precisely those sorts of problems for the Cypriot banking sector. This was not just a concern for Cyprus, though. Even though Cyprus' banking sector is tiny relative to the rest of Europe's, one Cypriot bank defaulting on what it owed other banks could put the whole European banking system in question, and the last thing the European Union needs now is a crisis of confidence in its banks.
The Cypriots were facing chaos if their banks failed because the insurance system was insufficient to cover the claims of depositors. For its part, the European Union could not risk the financial contagion. But Brussels could not simply bail out the entire banking system, both because of the precedent it would set and because the political support for a total bailout wasn't there. This was particularly the case for Germany, which would carry much of the financial burden and is preparing for elections in September 2013 before an electorate that is increasingly hostile to bailouts.
Even though the German public may oppose the bailouts, it benefits immensely from what those bailouts preserve. As I have pointed out many times, Germany is heavily dependent on exports and the European Union is critical to those exports as a free trade zone. Although Germany also imports a great deal from the rest of the bloc, a break in the free trade zone would be catastrophic for the German economy. If all imports were cut along with exports, Germany would still be devastated because what it produces and exports and what it imports are very different things. Germany could not absorb all its production and would experience massive unemployment.
Risk of a Greek default is 100% according to credit default swap traders, while the probability is rising in Portugal, Italy, Ireland and Spain.
NEW YORK (CNNMoney) -- Experts agree it's almost certain that Greece will not be able to pay all of its debts. But if the country does default, what happens next?
Greek leaders are struggling to agree to a set of painful budget cuts, including layoffs and new taxes, in order to get the next round of bailout cash from its European partners. But Greece is in the midst of a painful recession, which is cutting tax collections and causing it to sink even deeper into the deficit hole.
And even if Greek and European officials can agree on deficit reduction measures, the bailout plans need to run a gauntlet of votes in 17 separate European parliaments. Last week, just the news that the Austrian parliament had failed to set a timetable for a vote sent European and U.S. markets sharply lower.
Meanwhile, investors trading in credit default swaps, which are essentially bets on whether or not there will be a default, are now pricing in nearly a 100% chance of default on Greek debt.
A default in Greece could cause investors to flee the debt of other troubled European economies, including Portugal, Ireland, Italy and Spain. Investors trading in credit default swaps are now placing the chance of default in those countries at between 28% to 66%.
While Greece has only about €300 billion ($411 billion) in outstanding debt, believed to be mostly in the hands of European banks, adding all five countries' debt together comes to €2.8 trillion ($3.8 trillion).
Spain and Italy are particularly worrisome. If those countries were to default, European authorities would not have enough money to bail them all out.
"They can survive a Greek default. They can arguably survive if Portugal and Ireland go down as well," said Jay Bryson, international economist with Wells Fargo Securities. "But you include Italy and Spain, now we're starting to talk some real money here. You could easily be talking €1 trillion in writedowns. That would be a disaster."
While some experts hope there can be an orderly, pre-approved default on Greek debt that wouldn't ripple through the financial system, the bankruptcy of Lehman Brothers in 2008 proved no one can know what the implications of a default would be.
"I don't know if 'controlled default' is an oxymoron," said John Makin, resident fellow at the American Enterprise Institute, a think tank. "It's a very difficult situation to control. We're more ready for it this time than we were in 2008. U.S. banks are better capitalized, so we should be able avoid the seize-up scenario. But it's still touch and go."
And a wave of European debt defaults will topple Europe into recession, which would hit a U.S. economy already at risk of falling into a double-dip recession.
Greece Has 98% Chance of Default on Euro-Region Sovereign Woes
By Abigail Moses - Sep 13, 2011 7:06 AM MT
Greece has a 98 percent chance of defaulting on its debt in the next five years as Prime Minister George Papandreou fails to reassure investors his country can survive the euro-region crisis.
“Everyone’s pricing in a pretty near-term default and I think it’ll be a hard event,” said Peter Tchir, founder of hedge fund TF Market Advisors in New York. “Clearly this austerity plan is not working.”
It costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greece’s debt for five years using credit-default swaps, up from $5.5 million in advance on Sept. 9, according to CMA. Greek bonds plunged, sending the 10- year yield to 25 percent for the first time.
German Chancellor Angela Merkel said she won’t let Greece go into “uncontrolled insolvency” as politicians try to limit contagion to other euro members. Papandreou’s pledge to adhere to deficit targets that are conditions of the European Union and International Monetary Fund’s bailout were undermined by data showing his country’s budget gap widened 22 percent in the first eight months of the year.
The default probability for Greece is based on a standard pricing model that assumes investors would recover 40 percent of the bonds’ face value if the nation fails to meet its obligations. CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated credit- swaps market, lowered its recovery assumption to 38 percent late yesterday, which would give Greece a 95 percent chance of default.
Economy to Shrink
Greece’s government now expects the economy to shrink more than 5 percent this year, more than the 3.8 percent forecast by the European Commission, as austerity measures deepen a three- year recession.
Papandreou approved a plan to help repair the budget deficit at the weekend amid swelling resistance from Greeks.
Greece’s 10-year bond yield rose 111 basis points, or 1.11 percentage points, to 24.65 percent as of 1:55 p.m. in London, after earlier climbing to a euro-era record of 25 percent. The two-year note yield increased 662 basis points to 76.17 percent, after rising to an all-time high.
Greek stocks fell, with the ASE Index tumbling as much as 1.2 percent to the lowest since 1995 and down more than a third from July 22.
The risk of contagion beyond Greece weakened the euro and boosted benchmark German bunds. The common currency fell toward its weakest level since 2001 against its Japanese counterpart, declining 0.6 percent to 104.99 yen.
Sovereign Record
An index measuring the cost of default protection on 15 European governments to a record. European bank debt risk also jumped to the highest ever amid speculation French lenders will be downgraded because of their holdings of Greek bonds.
The Markit iTraxx SovX Western Europe Index of credit- default swaps climbed one basis points to 354, an all-time high based on closing prices. The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers increased two basis points to 316, while a gauge of subordinated debt risk was up seven basis points at 557, according to JPMorgan Chase & Co.
“The contagion impact of a default will be severe, because next in the firing line will be Italy, Spain and it will take in the whole of the European banking sector too,” Suki Mann, a strategist at Societe Generale SA in London, wrote in a note yesterday. “This trio are already under intense pressure, but it will get much worse.”
Euro-Region Nations
Credit-default swaps on Portugal, Italy and France rose to records, according to CMA. Portugal jumped nine basis points to 1,224, Italy rose four basis points to 510 and France was up 7.5 basis points at 196.5. Germany’s government is debating how to support its nation’s banks should Greece fail to meet the budget-cutting terms of its rescue package, three coalition officials said Sept. 9. Merkel said in an interview with Berlin-based Inforadio that avoiding an “uncontrolled insolvency” was her “top priority” and that the region’s most indebted country is taking the right steps to getting its next bailout payment.
Credit-default swaps on BNP Paribas SA, Societe Generale SA and Credit Agricole SA, France’s largest banks, surged to all- time highs on bets they’ll have their ratings cut by Moody’s Investors Service this week.
French Banks
Swaps on SocGen were 14 basis points higher at 448.5, Credit Agricole increased 9.5 to 331.5 and BNP Paribas rose 16 basis points to 321, according to CMA.
Moody’s placed the three banks’ ratings on review in June to examine “the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels,” the rating company said at the time. Downgrades are likely as the review period concludes, said people with knowledge of the matter, who declined to be identified because the information is confidential.
A basis point on a credit-default swap protecting 10 million euros ($13.6 million) of debt from default for five years is equivalent to 1,000 euros a year. An increase signals declining perceptions of credit quality.
Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Greece Monetary Crisis...Doesn't This Sound A Bit Familiar?!
European Pressphoto Agency
Updated: July 22, 2011
Overview
Over the last decade, Greece went on a debt binge that came crashing to an end in late 2009, provoking an economic crisis that threatened both Europe's recovery and the future of the euro.
Over the next two years, Greece relied on bailout money from its richer neighbors and implemented austerity measures meant to cut its bloated deficit and restore investor confidence. It cut the pay of its public workers — a quarter of the work force — by 10 percent but continued to miss deficit targets as its economy sank. Investors continued to demand ever higher interest rates for Greek borrowing.
Prime Minister George A. Papandreou, who had discovered the full extent of the deficit only after taking office in November 2009, saw his popularity and that of his Socialist Party plummet. In June, he offered to step aside for a government of national unity, an offer that center-right New Democracy party rejected. The Socialists grew increasingly divided.
Greece barely avoided bankruptcy in June, as European leaders threatened to withhold a 12 billion euro installment of the bailout funds until another austerity package of cuts, tax increases and sales of public companies was adopted.
Even as Greece's government struggled to force the bill through in the face of days of massive street protests, the leaders of France and Germany and the European Central Bank clashed over a larger, longer-term second bailout package. German Chancellor Angela Merkel pushed to have bondholders take some losses on their investments; President Nicolas Sarkozy of France organized an ostensibly voluntary plan for French banks to roll over their bonds into longer-term debt; and the E.C.B. fought against both approaches while credit ratings agencies warned that even a "voluntary'' plan could be considered a selective default, potentially triggering writedowns across Europe. The stakes grew even higher as investors began driving up the interest rates charged on the debt of Italy and Spain, economic giants compared to Greece or Portugal.
But in late July, European leaders clinched a $157 billion rescue plan for Greece that could push the country into default on some of its debt for a short period but would also give Europe’s bailout fund sweeping new powers to shore up struggling economies. The outlines of the pact seemed particularly bold, dealing with the economic problems of bailed-out Ireland and Portugal as well as Greece, and calling for nothing short of a “European Marshall Plan” to get Greece itself on a road to recovery. The underlying economies of those countries — and others — remain remarkably frail, however, and the plan itself had many hurdles to overcome.
Background
Mr. Papandreou shocked investors and politicians across Europe when he announced in December 2009 that his predecessor had disguised the size of the country's ballooning deficit. After rounds of deep budget cuts and months of vague pledges of support from the rest of Europe failed to stop the steady rise of the interest rates, Mr. Papandreou in April 2010 formally requested a promised $60 billion aid package, calling his country's economy "a sinking ship.''
For U.S. investors, the worsening European financial crisis is going from an Old Worldsideshow to the main event.
Recent news, including the resignation of the European Central Bank's chief economist late last week and fresh rumors about a possible Greek default, are feeding investors' imaginations on how precarious the situation there is.
U.S. investors, already worried about domestic problems, wonder if a European spillover will make things worse for a fragile U.S. economy. If Greece defaults, it could imperil European banks that hold its bonds and tip Europe into recession. U.S. companies would feel the shock waves because they get substantial revenue from Europe.
Europe is the biggest overhang on U.S. stocks, trumping even concerns about anemic job growth in the U.S., says Liz Ann Sonders, chief investment strategist at Charles Schwab. The reason: There is a "real possibility" that Greece will default on its debt.
"It's front and center now, and a default could come sooner rather than later," Sonders says. "The bottom line is no one has the full ability to calculate the implications of a Greek default."
Greek Debt Crisis Timeline of Policy Summits, Bond Maturities
Q
By John Fraher - Sep 11, 2011 5:00 PM MT
Following is a list of the key events facing Greece before the end of the year. Greece has not said how much money it has in cash reserves. For full details on Greece’s funding commitments see {1004Z GA <Equity> DDIS <GO>}
Sept. 16 Euro-region finance ministers meet in Poland
Sept. 23-25 International Monetary Fund/World Bank meeting in
Washington
Sept. 23 2 billion-euro ($2.7 billion) Treasury bill
matures
End September Bailout tranche due, the sixth from the April
2010 bailout agreement. European and IMF
officials return to Athens in week of Sept. 12
for talks with Greek policy makers on disbursing
8 billion euros in aid. German Finance Minister
Wolfgang Schaeuble said Sept. 9 that no funds
will be given unless Greece fulfils the
conditions agreed in its adjustment program.
End September Informal deadline for ratification of new powers
for the European Financial Stability Facility.
Expanding the fund’s remit is part of the bailout
package agreed on July 21.
Oct. 3 Euro-region finance ministers meet in Luxembourg
Oct. 6 European Central Bank rate decision in Berlin
Oct. 14 2 billion-euro Treasury bill matures
Oct. 14-15 Group of 20 finance ministers meeting in Paris
Oct. 17-18 European Union leaders summit in Brussels
Oct. 21 1.63 billion-euro Treasury bill matures
Nov. 1 Mario Draghi replaces Jean-Claude Trichet as
president of the ECB
Nov. 3 ECB rate decision in Frankfurt
Nov. 3-4 G-20 leaders’ summit in Cannes
Nov. 7 Euro-region finance ministers meet in Brussels
Nov. 11 2 billion-euro Treasury bill matures
Nov. 18 1.3 billion-euro Treasury bill matures
Nov. 29 Euro-region finance ministers meet in Brussels
Dec. 8 ECB rate decision in Frankfurt
Dec. 9-10 EU leaders summit in Brussels
Dec. 16 2 billion-euro Treasury bill matures
Dec. 19 1.17 billion-euro government bond matures
Dec. 22 0.98 billion-euro government bond matures
Dec. 29 5.23 billion-euro government bond matures
Dec. 30 0.71 billion-euro government bond matures
End December Seventh aid tranche may be due
By CHRISTOPHER S. RUGABER - AP Economics Writer| AP
WASHINGTON (AP) — Moody's Investors Service on Wednesday threatened to lower the United States' credit rating, saying there is a small but rising risk that the government will default on its debt.
The credit rating agency said it will review the U.S. government's triple-A bond rating because the White House and Congress are running out of time to raise America's $14.3 trillion borrowing limit and avoid a default.
The government reached its borrowing limit in May. Treasury says the government will default on its debt if the limit is not raised by Aug. 2.
A downgrade would raise interest rates on U.S. treasury bonds, increasing the interest paid by U.S. taxpayers. It would also push up rates for mortgages, car loans and other debts, which are linked to Treasury rates.
Moody's had warned in June that it would take this step if President Barack Obama and Republican lawmakers failed to make progress on an agreement by mid-July. The other credit ratings agencies, Standard & Poor's and Fitch, have said they may make similar moves.
Some Republican lawmakers have expressed skepticism that failing to raise the limit would have a major impact.But Moody's provided a stark assessment: "An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments."
In short, that means the U.S. would lose its top rating, the agency said. Because a default would likely be short-lived, Moody's said it would likely downgrade U.S. debt to double-A. That is the second-highest of nine rankings under Moody's system.
And Moody's warned that the U.S. wouldn't regain its triple-A rating right away if lawmakers raised the borrowing limit after a short-lived default. The agency said it would leave the rating unchanged for the "near term," although it didn't say how long that would be.
Moody's has never given the U.S. government anything lower than its top rating since it began evaluating the country's debt in 1917.
Moody's acknowledged that fights over the borrowing limit have been contentious before. But it said bond interest and principal have always been paid on time.
The nation would likely retain its triple-A rating if the limit is raised before a default. But Moody's said it could assign a negative outlook on U.S. debt if lawmakers and the president fail to make major progress on a long-term plan to reduce the federal deficit.
Jeffrey A. Goldstein, a Treasury Department official, said the announcement is a "timely reminder of the need for Congress to move quickly ... and agree upon a substantial deficit reduction package."
But talks between the Obama administration and Republican leaders in Congress are at a standstill. Republicans are insisting on deep spending cuts as a condition of voting to raise the limit. Democrats want to include tax increases to help close the budget gap, a move Republicans adamantly oppose.
Obama and Republican lawmakers met for a fourth straight day Wednesday. Obama has said the daily meetings will continue until a deal is reached.
The stalemate prompted the top Republican in the Senate to propose giving Obama sweeping new powers to increase the limit to avoid default. Other Republicans criticized the idea.
"We need to get hit over the head to do the right thing," said Maya MacGuineas, president of the Committee for a Responsible Budget, a bipartisan group of experts and former members of Congress that study budget policy issues. "It's terrible it's gotten this far but it's necessary," she added, referring to Moody's review.
Robert Bixby, executive director of the Concord Coalition, which advocates for deficit reduction, said the warnings from the ratings agencies reflect concerns about U.S. politics, rather than its ability to handle large debts.
"Right now we've got these dysfunctional debt limit talks," Bixby said. "It's not surprising that an agency like Moody's would weigh in and say, 'Hey guys, this is the real world.'"
The Euro-Debt Crisis: Greece, Portugal, Spain. The Debts are Unpayable. Once the Lending Stops the Bottom Falls Out.
by Bob Chapman
We hope all of our appearances on Greek TV, radio and in the press have helped the educational process and to allow the Greeks to identify who the real culprits are, and what to do about it. It has just been over a year since this tragedy became reality, but we reported on Greece and Italy ten years ago. They both bent the rules to enter the euro zone. We knew then that Goldman Sachs and JPMorgan Chase were assisting them by creating credit default swaps. There were a few European journalist who reported on the issue, but the elitists control the media and few noticed that Greece and Italy were beyond bogus. The events of the past year remind us of the onslaught of the credit crisis, which unfortunately is still with us. What finally brought about trouble for Greece and other euro zone countries was the zero interest rate policy of the Fed and slightly higher rates by the EC. These policies encouraged speculation and caused problems that would have never happened otherwise. In addition, the stimulus measures by both banks were embarked upon to save the financial sectors and in that process promote speculation by the people who caused thee problems in the first place. That began with QE1 and stimulus 1, which we now recognize as our inflation drivers. Wait until QE2 and stimulus 2 appear next year. It will be very shocking.
Just to show you what a loser lower rates are just look at economic progress. There has been no recovery under either QE1 or QE2. Even 4.60% 30-year fixed rate mortgages have not encouraged people to buy homes. They are either broke or they don’t know whether they will be employed five-months or even one year from now, so how can they buy a house? Consumer spending is falling along with wages. The small gains you see are for the most part the result of higher inflation.
Growth moved from the fourth quarter of 2010 of 3.1% to 1.8% in the first quarter of 2011. We had forecast 2% to 2-1/2% growth for 2011. That is little to show for a minimum of $1.8 trillion spent in QE2 and stimulus 2. Without that we probably would have been at a minus 2%. Just think about that. Trillions of dollars spent with little results. Obviously such programs do not work very well. You would have thought the Fed would have found a better way after two such failures. They know what the solution is, but they won‘t put it into motion and that is to purge the system and face deflationary depression. That will happen whether they like it or not, but in the meantime the flipside is 10% inflation headed to 14% by yearend and another greater wave next year, and another in 2013. Unimpressive results is not the word for it. It has been a disaster and the Fed keeps right on doing it. As a result of the discounting of QE3 we wonder what the stock market has in store for us? We would think that a correction would be in the future. If that is so could that negatively affect the economy? Of course it could. All the good news coming, further stimulus by the Fed, will have been discounted. What does the Fed do for an encore? Create more money and credit – probably? Does that mean hyperinflation, of course it does. If the Fed stops the game is over. We are also seeing fewer results from additional stimulus. It is called the law of diminishing returns. In the meantime the dollar goes ever lower versus other currencies, but more importantly versus gold and silver.
If you can believe it, even though the Fed has provided financial flows and assisting speculative flows so Wall Street, banking and hedge funds can glean mega-profits, it still has not provided enough liquidity for additional GDP growth. The small and medium sized businesses have been shut out. The latter participants do not play those games, it is the propriety trading desks, hedge funds and the remainder of the leveraged speculating community that takes advantage of the excess liquidity and the Bernanke put of keeping bonds and stocks up artificially. The Fed and the others are sustaining this process. There are negatives for the Fed and their friends, higher commodity and gold and silver prices. The Fed and banks temporarily took care of that and haven’t quite finished their latest short-term foray in that sector. There are still fears as well regarding Greek debt fears and their CDS, Credit Default Swaps, and those of other euro zone members. They could still blow up in everyone’s faces in a partial if not total default, which is very likely. Banks are on the wrong side of this trade as well as the bond trade, not only with Greece, but with five other nations as well.
In the final analysis papering over the problem never works. The problems also reemerge with new additional problems. The combination of excessive speculation and liquidity and too big to fail is going to end badly, as it always has. De-leveraging will eventually rear its ugly head.
As we said, Greece and others could cause extensive bond and CDS problems and that is not only being reflected in a lower euro, but in higher Greek bond yields of 16-3/8% in their 10-year notes and 24-3/4% in two-year yields, and Portugal, Ireland and Spain are not far behind. The socialists just lost the latest election in Spain in a big way showing the public is fed up with the lies of government and the bankers. The euro is attempting to break $1.40 to the downside as a result of those election results and the Greek impasse. It is obvious that Greece cannot service its debt and reduce its deficit and the other deficient nations are in the same boat. The CDS marketplace would be severely disrupted if there were a sovereign debt default. That fear, of contagion, could be seen in higher rates in Spain, some .30%, the highest upward move this year. Greece, Ireland and Portugal have problems that can never be resolved and Spain, Italy and Belgium are not far behind.
Spain is implementing austerity, but that means like in recent weeks millions have demonstrated in 72 Spanish cities. The 17 autonomous regions have doubled their debt in the last 2-1/2 years. The socialists just did not know when to stop, now they are out of office. Spain is going down. There is no way they can sustain. That should bring the CDS situation front and center. It will also increase unemployment for those 18 to 35 to 40% or more. It is not surprising that half of the protestors were in that age group.
Greek PM George Papandreou, who secretly promised Europe’s elitists bankers that he would sell-off and or pledge Greek state assets, wants to sell stakes in Hellenic Telecommunications, Public Power Corp., Postbank, the ports of Piraeus and Thessaloniki and their local water company. All supposedly worth $70 billion. The bankers, of course, say they are worth far less. They want to buy them for 10% to 20% of what they are worth – so what else is new. The Cabinet went along with the giveaway, as expected, and without a whimper. The EU is demanding all the assets be sold off immediately, so the bankers can buy them as cheaply as possible. The threat by the bankers is if you do not sell and sell fast for a pittance, then we won’t fund loans of $42 billion over the next 2-1/2 to 3 years. If not funded it would be “re-profiled” another new euphemism for default and debt restructuring, or perhaps debt extension.
Fears were growing last night that Italy was about to become the next country to join the euro debt crisis.
European Council president Herman Van Rompuy has called an emergency meeting for today over worries Rome will follow Athens, Dublin and Lisbon and need help to avoid defaulting on its national debt.
However, if Italy – the eurozone’s third largest economy – went the way of Greece, Ireland and Portugal it could have huge repercussions.
Crisis: European Council president Herman Van Rompuy (pictured) has called emergency talks to help save Italy's ailing economy
Italy has an estimated national debt of around £1.1trillion, which equates to 103.7 per cent of its GDP.
That compares to Greece’s national debt of £220billion – around 158 per cent of its GDP – and the UK’s debts of £650billion or 47.2 per cent of GDP.
Only last week cuts of almost £40billion were announced by Rome as part of an austerity package.
It came after Italy’s credit rating was downgraded last month and on Friday the country’s stock market plunged more than 3 per cent amid a huge sell-off of bank shares and other government assets.
Sources said that another reason behind the meeting in Brussels was the suggestion that Italian president Silvio Berlusconi was thinking of sacking finance minister Giulio Tremonti, who is seen by many as a safe pair of hands but who has clashed with his boss.
Former Italian prime minister Romano Prodi blamed the current crisis in Italy on the ruling centre right coalition. He said: ‘The weakness of the economy is due to internal political factors within the government. We need stability.’
Other opposition MPs even suggested that Italy – with its debt – should pull out of the eurozone altogether. Marco Rizzo said: ‘Reality tells us this is the best thing to do.’
In the most recent International Monetary Fund projections, Italy’s headline debt will reach 120 per cent of national output this year, and then decline only slightly to 118 per cent by the end of 2016.
The size of the debt means it is unlikely the EU or the IMF could provide a rescue package for its creditors and would instead have to offer loans or guarantees which would once again mean other countries, including Britain, chipping in.
Chaos: Greece has seen huge civil unrest because of its 28 billion-euro bailout, which could be repeated in Italy
British taxpayers have already contributed £12.5billion in aid to Greece, Ireland and Portugal.
The majority of Italy’s government debt is held by the country’s banks and they have managed to weather the crisis better than their European counterparts.
Italians themselves have little faith in the country’s financial institutions with the majority holding no credit cards and much of the economy driven by cash transactions.
According to the UK Trade and Investment website, British exports to Italy in 2008 were valued at more than £9billion and imports from Italy were over £13billion.
Today’s meeting will also be attended by European Central Bank president Jean-Claude Trichet. Others expected there are Jean-Claude Juncker, chairman of the region’s finance ministers, and Olli Rehn, the economic and monetary affairs commissioner.
Cyprus' Dilemma
As awful as 2011 has been for big U.S. financial stocks, European banks have peformed even worse.
