Why here? Why now? Why this particular eurozone peripheral?

In it emerging markets specialists Michael Gavin and Piero Ghezzi explore the ‘why? question by making a comparison between Italy and Japan. Both countries have been plagued by relatively high levels of debt for years, yet only one has caught the attention of markets recently. In fact, Japan’s debt-to-GDP ratios stands at a whopping 230 per cent — almost twice Italy’s 120 per cent.

Here’s a summarised explanation from BarCap:

We argue that the absence of market anxiety about Japanese public debt sustainability has plausible explanations: the country’s strong external position means that Japanese bonds are owned almost entirely by domestic investors who tend to be (rightly or wrongly) less prone to panic than external bondholders. Control over monetary policy is another key difference: the extreme tail risk of a default event caused by the government’s running out of the currency that it owes to bondholders simply does not exist for Japan, as it does for the Italian government.

Which seems fair enough. But you could also stretch the question to other G7 nations, as Bank of America Merrill Lynch economists have done. According to them, the risks to Italian debt seem roughly balanced over the next decade or so. Unlike say, in the US, where fiscal scenarios are more stressed.

Anyway, none of that really answers what caused recent Italian contagion.

We’d point out, as we’ve done before, that all of these latent financial problems — be it Japan’s massive indebtedness or Australian bank funding — tend to be fine as long as the market feels they are fine.

via ftalphaville.ft.com