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Merrill warns of major global crisis over Italy

Merrill warns of major global crisis over Italy (by Barbara Kollmeyer)

MADRID (MarketWatch) -- A further deterioration in Italy's bond market could threaten the global economic recovery and lead to "tail risk scenarios for global financial markets," warned Bank of America Merrill Lynch in a note to investors on Tuesday. "As the third largest bond market in the world, after Japan and the U.S., Italy could be systemic. Funding pressures in Italy, and even more so a sovereign crisis, would have implications, in our view, that would extend well beyond the euro zone," the analysts said. They added that markets appear to be underestimating such risks with volatility low and the euro relatively strong. The analysts said unless euro zone leaders considerably strengthen the European Financial Stability Facility immediately and Italy resolves its political issues and adopts a more "credible and frontloaded fiscal consolidation plan," along with "ambitious structural reforms," the spike in Italy's borrowing spreads over Germany could "snowball into a major crisis for the global economy," substantially knocking the euro.