Ever since Spain's €100 billion bank 'bailout' investors began turning their attention to Italy. And on Thursday evening Moody's downgraded the country's credit rating by two notches, from A3 to Baa2, citing an ever decreasing foreign investor base and a poor economic outlook as the biggest threats. According to Bloomberg, Italy's rating is now on par that of Kazakhstan, Bulgaria, and Brazil. This is not good news. Italy is the euro area's third largest economy and neither the EU or the IMF have enough resources to rescue it. Many analysts argue that if Italy fails it will be the end of the euro.
Crucially however, Italian banks are not massively undercapitalised (unlike those in Spain). The EU's capital exercise results from 2011 show that UniCredit was the bank most in need of capital, with an equity shortage of just under €8 billion. But in January this year the bank raised €7.5 billion through a rights issue. A bailout is not inevitable.
