Debt Dilemma: Mama Mia! Abyss Awaits

By Nizar Manek, 15 September 2012
The crisis in Europe is starting to focus on Italy, chilling optimism following the Spanish bailout. A finance professor says Italy is the end game for the euro. Spain and Portugal remain as big worries too.
Italy is moving into the crisis cross-hairs. That development has chilled any euphoria over the recent Spanish bailout package. Italy hasn’t yet taken international assistance, but its debt-to-GDP ratio stands at 120%. The euro’s end game is Italy, says Ed Altman, a finance professor at New York University. Italy is “too big to save,” says Altman, who fears the euro will survive only if Italy avoids a bailout.
Two years ago, Altman and Amsterdam-based professor Herbert Rijken hatched a model that makes a “bottom-up” prediction of sovereign risk. Their “Z-Score” model aggregates the average probability of default of listed nonfinancial and financial companies, whose health is central to that of the sovereign. Altman’s model correctly predicted Europe’s current hierarchy of risk: Spain and Portugal on the bottom, with Italy a bit higher.
(224 words)