Spain, Italy may be the first recipients of ECB aid

Spain and Italy, which are facing struggling economic prospects, are likely to be the first countries to go cap in hand to the European Central Bank, asking for help, a leading expert warned Friday.

“We think that in Italy and Spain the liquidity problems will persist and eventually they will be the first customers of the Outright Monetary Transactions OMT program,” Angus Armstrong, director of macroeconomic research at the National Institute for Economic and Social Research, said.

The NIESR said in its latest report published this week the outlook for the Italian economy was poor, predicting that the Italian economy would contract by 2.3% this year, and 0.7% in Y 2013.

The report, co-authored by Armstrong, said the ECB’s OMT program had reduced the risk of insolvency but there were longer-term challenges center on lower capital ratios which Italian banks have, compared to the European average.

Spain’s prospects were similarly poor, with the economy likely to be in recession in Ys 2012 and 2013, and GDP falling by 1.8% this year and 1.3% next year, according to the forecast.

Austerity measures by the government are likely to fuel unemployment which in turn decreases consumer confidence and spending, and external factors like the slowing of economic growth elsewhere in the world and the contraction of the Eurozone economy continue to put the Spanish economy under pressure.

Armstrong, a former head of macroeconomic research at the British finance ministry, said that sovereign risk issues are not going to go away in the short term for the two countries.

Under the program announced in September, the ECB would buy bonds of Eurozone nations suffering from sovereign debt crisis, to prop up those nations, where the international monetary market has avoided for fear of default, with a line of credit.

The ECB plan has not been put into practice at the moment, and the Key details of when the ECB would step in to buy a nation’s bonds have not been revealed, partly because they are market sensitive and partly because the ECB needs a room for further maneuver.

In the absence of committed intervention, it is impossible to be certain about what conditions the ECB would impose on a nation’s finance ministry in return for bond-buying. Such conditions would be different for each particular nation which applied.

“The real issue is conditions; this is a big test for northern European countries. What will they accept for bond-buying? And if they put conditions the countries, what could they be?” he commented.

Mr. Armstrong said that for Greece, the conditions were “extremely punishing, but no-one is saying that this is causing massive problems, in Italy and Spain it is different, because you cannot afford to let those countries slip.”

Paul A. Ebeling, Jnr.Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.

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