'Big Bazooka': It's the only thing that can save Italy now, says Roubini

The political and economic crisis in Italy has spurred fears of a split in the eurozone with borrowing costs for Europe’s third biggest economy at unsustainable levels and the bloc unable to afford a bailout.

Economist and Dr Doom, Nouriel Roubini, who became famous after predicting the economic crisis of 2008 feels the eurozone break up can only be prevented if the European Central Bank acts as a lender of last resort, cuts interest rates to zero and provides a fiscal stimulus  and devalues the euro.

In an article in Financial Times, Roubini argues “Italy and other illiquid, but solvent, sovereigns need a “big bazooka” to prevent the self-fulfilling bad equilibrium of a run on the public debt. The trouble is, however, that there is no credible lender of last resort in the eurozone.”

However, the central bank has so far opposed any role in helping to leverage the eurozone’s rescue fund.

The ECB has told governments not to expect the bank to rescue them with unlimited funds, despite its efforts to stabilise runaway bond markets.

“We are not the lender of last resort and I do not advise European governments to ask the ECB to become lender of last resort,” Juergen Stark, who will quit his post in protest at continued bond-buying told a conference in Frankfurt.

“This will mean that the ECB immediately will lose its independence.”

Many outside Europe are calling on the ECB to take a more active role as other major central banks do in acting as lender of last resort. German opposition to that remains implacable, seeing it as a threat to the central bank’s independence.

With mounting public debt of over 1,900 billion, Italy is not only too big to fail but also too big to save, said Roubini in a tweet yesterday. He also reiterated that European Financial Stability Facility, which is the European rescue fund, and the special purpose vehicle intended to leverage it are merely “turkeys” that “will not fly.”

Moreover, since ECB clearly doesn’t want to be the lender of the last resort and providing unlimited financial support to these countries is illegal according to the treat, Italy “will be forced into a coercive debt restructuring,” tweeted Roubini yesterday.

However, this restructuring will still not enable growth in the periphery and will lead to an eventual break up of the eurozone.And to resolve Italy’s huge fiscal deficit, the country may just abandon the euro and return to its national currency.

To read more on Roubini’s op-ed. Click here

With inputs from Agencies