Signs of Trouble in Italy and Germany

By TraderVox.com

Tradervox.com (Dublin) – The Italian Scenario: There are sentiments in the market that Italy will require bailout soon; in fact, some analysts are talking about some kind of help within the month of July. Euro zone economic specialists are saying that the crisis in Italy has taken a back seat just because of the crisis in Spain. Italian benchmark yields have risen and it might require bond-buying program to reduce it. The good news on the Italian scenario is that the EU Summit decided to offer no seniority for the ESM fund over private bondholders. However there are more bad news for the country.

Despite the fact that no seniority decision will also apply to the Italian case, there are too many holes on the decision the biggest being opposition from some member countries. Another problem is that the current bailout mechanism might not be sufficient to protect Italian economy and its debt. If Italy was to require bailout, euro zone would be plunged into deeper crisis this would scare off investors weakening the euro even more. Further, Italy asking for bailout would mean withdrawing its contribution from the current bailout fund which would further complicate the debt crisis.

The German Scenario: There are many investors and analysts who see the euro as the heir of Germany’s old currency, the Deutschmark. This is supported by the reaction of the euro on Germany’s data. For instance, the ECB takes into account inflation data from Germany when making interest rate decisions. Further, German surplus has pushed the whole region into surplus. Despite the positive reports from Germany keeping the euro afloat, there are signs that this might not last long.

For instance, the current low PMIs have shown a contraction, with manufacturing being the most notable. In addition, the business confidence is falling as indicated by ZEW and IFO survey results in the past. The Retail Sales continue to disappoint each month as it comes short of the market expectation. Further, the situation in Germany seems to worsen as demand from China and the rest of Asia falls.

These scenarios in both Italy and Germany are weighing on investor sentiments which continue to worsen month after month.

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