In one of the most anticipated Credit Congress sessions in years, renowned New York University Professor Ed Altman, PhD, noted that his interest in sovereign activity has been percolating in recent years, especially with the struggles happening in Europe. Altman, who invented the vaunted Z-Score bankruptcy/insolvency predictive metrics system, noted that with Greece a virtual lock to default and with Spain getting more likely to do so by the day, it might eventually be the performance of Italy that decides whether on not the European Union's common currency can withstand crisis and continue on.
“The bottom line on Europe is that the hero or villain is going to be Italy,” Altman, the Max L. Heine Professor of Finance at the NYU Stern School of Business and director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions, told a large educational breakout session Wednesday. “Spain may be is too big to fail, but Italy is too big to save.”
Among things Italy has in the positive or hero side is the new government that Altman characterizes as “more enlightened.“ And, unlike its Spanish counterpart, Italy has exportable, brand-name products and services to help the economy grow as opposed to relying on things like tourism and internal real estate. Working against it is that Italy has third largest sovereign debt (2 trillion euro) in the world. Additionally, it has traditions – and not particularly productive ones – from a business standpoint that are hard to break. And, now, the interest rate on 10-year bonds is above 6%, which is thought by many to be unsustainable.
Altman predicted the chances are of Italy making it through and being the euro hero are about 50-50. Unfortunately, his take on that topic was a 70-30 probability just one year ago. The potential carryover damage, primarily coming from Spain's banking sector, has moved the needle in a negative direction.
“They now have a better government and seem to know what they need to do,” said Altman, who recently launched a Z-Score-Plus Smart Phone app which now includes predictive measures for public European Union companies. “The question is whether they have the will to do it.”
-Brian Shappell, CBA, NACM staff writer
(Note: Altman's Z-Score-Plus smart phone app is available to NACM members and Credit Congress attendees at a discount).