20.5.05

Misery loves company

Banque AIG, the financial wing of the US insurance giant, said Italy needed a 20pc devaluation to prevent a slump and a "horrendous" explosion of public debt. The warning came as fresh data from Portugal and Italy point to the worst budget deficits since the launch of the euro.

Portugal's central bank has revealed that the country's deficit was likely to reach 7pc in 2005, far higher than earlier estimates. Lisbon is mulling "Draconian" cuts that risk driving the debt-laden economy into deep recession. Rome's REF research institute forecasts an Italian deficit of 5.7pc next year, smashing the EU's 3pc limit.(...)

Toby Nangle, author of a new study on the Argentine crisis at Baring Asset Management, said there were close parallels between Italy's plight and Argentina's dollar-peg ordeal.
Markets remained complacent about Argentina until a political crisis in October 2000 changed the mood, causing bonds spreads to widen sharply.
"Italy's fiscal and debt position is worse than Argentina's," he said.