Italy may need to exit the euro zone and revert to its own national currency to resolve its debt crisis, thereby forcing the break-up of the euro zone, Nouriel Roubini wrote in an opinion piece in the Financial Times on Friday.
Roubini argued that with yields on its sovereign debt hovering around the 7 percent mark, market access may become limited for Italy. A forced restructuring of its debt could help solve some of its issues, but it would not address other issues that hamper the Italian economy such as a lack of competitiveness, a large current account deficit and lower gross domestic product, he wrote.
Unless a lender of last resort for “stressed” countries within the euro zone can buy the sovereign debt, the higher yields would reach unsustainable levels, Roubini argued in the FT.
However, to date the European Central Bank has underlined its independence by stating it would not act as the lender of last resort for the euro zone economies.
Roubini noted the urgent need for a lender of last resort in the euro zone.
Eurobonds had already been dismissed by Germany, he noted, and warned that an increase in the size of the European Financial Stability Facility (EFSF), which in its leveraged form he describes as a “turkey that will not fly”, would not be accepted by the German electorate. In any case, it would be deemed illegal under the no bailout clause of the existing treaty, Roubini said.
The leveraged EFSF, he said, was a giant CDO that would not work as it would not reduce spreads to sustainable levels. Suggestions that the EFSF could be turned into a vehicle for reserves of central banks to become the equity tranche for sovereign wealth funds and emerging economies - notably the BRIC countries – to turn it into a 'Triple-A senior tranche' sounded like a giant sub-prime CDO scam, he wrote.
This coupled with limited IMF capacity to bailout the larger economies means that spreads on Italian debt has reached a point of no return, according to Roubini.
He said no political change could alter the fact that its debt to GDP ratio of 120 percent meant it would need a primary surplus of 5 percent just to keep a lid on its debt.
Roubini wrote that Italy faced a worsening recession as austerity measures took their toll. He argued that it was this recessionary deflation which would ensure the debt would become unsustainable. None of this, he argued, would bring growth and competitiveness back to the Italian economy.
This would leave no option but to leave the euro and reintroduce the lira. The exit of an economy the size of Italy would lead to a break-up of the euro zone and is now increasingly likely, Roubini wrote.
He argued the only way to avoid a breakup of the euro zone would be for the ECB to become a lender of last resort, for a fall in the euro's value in line with the dollar and for fiscal stimulus for the "core" euro zone and austerity in the periphery to take place.