Article analysis

Finance & Accounting
4 pages (1000 words)

Italy Too Big to Fail and Too Big to Bail – Is US listening

The article, Italy Too Big to Fail and Too Big to Bail – Is US listening is very relevant to the European debt crisis.  This article focuses exclusively on Italy and not other nations like Greece, Ireland and Portugal which were most affected by the economic situation. An analysis of the crisis faced by Greece, Ireland and Portugal would have helped in explaining the similar situation that Italy currently faces.  A closed scrutiny and vigilance in the fiscal analysis of budgeting would have helped countries such as Greece, Ireland and Portugal from facing such severe economic threats.

The huge economic deficit resulted in the restructuring of their debts. .The deficit could have reduced by austerity measures in former years, without considerably affecting the GDP. Lack of such foresight in fiscal matters has brought about the present crisis in countries like Greece, Ireland and Portugal. Italy is a developed industrial country that arose rose from a sound agricultural background prevalent in the earlier years. Over the years,it had emerged into a developed industrial economy that was enviable even to superpowers like Germany and Greece.

The debt crisis prevalent in in countries like Greece, Italy and Portugal the proved to be contagious to Italy also. During the second week of September 2011, Italy the third largest economy in the Euro zone plunged in to a debt crisis of slow growth in GDP and high debt. Italy has more than $1 trillion government debt which is in a high proportion compared to the total national output of $1.2 trillion. In this article, the author explores the present trend of higher rate of yielding of bonds that put the economy in such a serious condition necessitating to raise new bonds or to approach other financial institutions for a bail . The investors  found it too risky to maintain their deposit in such a state of fiscal affairs. There was clear evidence of illiquidity in the financial market causing threat to investors.

Italy’s economy is in a risky position now. In a regular circumstance,  during the period of financial crisis  in Eurozone countries, it is European Central Bank that takes the emergency measures to help the countries to overcome the  crisis. However,  with Italy, it is a very though task for both European central bank and for International monetary fund to bail out Italy. Very vigilant and highly expertise fiscal management is the need of the time. Prime concern is to be given to maintain faith in the investorsA budget management plan that does not affect the growth rate of the economy and restructure the debt is necessary.  Italy is a huge economy and hence, any calamity can worsen the condition of its surrounding economies in the European Union. In Europe, economies of most of the other nations are also not in an enviable condition. Such a situation will also affect world economy. In this context,  it will be helpful to examine the successful measures taken by governments such as Canada, Sweden, and Brazil etc where such negative signs of financial recession appeared in the earlier years. Italy can definitely overcome this  situation, but once the control is destroyed a coming back will not be possible because the entire Eurozone as a whole would have been put into such a serious situation that is too difficult to manage.

The author of the article tries to view the situation from the US perspective and the critical question that he raises is whether the US financial authorities have seriously taken into account the European experience in the debt crisis. However, recent developments in US economy have revealed that the US Treasury Department and White House has been paying rapt attention over economies all over the globe. The United States stands ready to help Europe with its debt crisis. Recently, in a meeting at white house, President Obama expressed his readiness to help the  European Union in the present financial crisis. However, he has not put forward any definite measures in that respect. It will be of great interest to examine whether the US  will be able to extend any helping hand to the European debt situation.. It is to be noted that economic position of the US iss also vulnerable. On account of the marginal increase in economic deficit, warning has been given to the US by credit rating agency Fitch to reduce their economic deficit at least by 120 crores dollars. However,  the US congress failed to do so. Following these developments,  on 28/11 Fitch has readjusted negatively the credit rating of US negatively. The reason quoted by Fitch is that there is lack of faith in the investors  on whether the American economy is on the path of growth or not. In G20 meeting held in September, the European crisis was discussed and on 22/9 G20 nations pledged to do whatever things necessary to restore financial stability and bring about a sense of calm to the financial markets in Europe. Treasury secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke represented the US at the discussions. The negative trend in credit rating of US indicates  an immanent recession in US economy. US has almost   $14 trillion debt and most of this debt is held overseas in developing and developed countries such as China, Japan, and UK and oil exporters. So, I strongly believe that the US must try to do everything to keep its balance in the fiscal field by upholding the faith of investors.

The author has strongly asserted that the US authorities must display strong willpower to resort to taking drastic political and financial steps to keep the economy in balance. More efforts are to be made to chalk out a long-term programme to keep the economy in a healthy state. Political parties, irrespective of the difference as to treasury bench or opposition, must rise to the occasion to recognise the danger that may fall on their nation. It is important for the US  to realize the fact that any severe crisis on their economy will make a cascading effect on other nations and the ultimate result will be a great global recession.