Is Italy Heading for Default?
Any potential partial writedown of Italian sovereign debt will dwarf the effect of a Greece writedown.
Back on Sunday Zerohedge.com posted the below chart from Bloomberg, which may or may have not reposted it from another source.
There are three important features to this chart. Probably the least important is the vertical scale although that has the potential to bite some institutions or hedge funds big-time. The bubbles are the size of sovereign debt by European countries. Big is bad, further right is even worse. Obviously, Greece is overleveraged and is paying the price for it now. The giant meteor in the sky is Italy. The size of the meteor is $1.8 trillion dollars of sovereign debt. Roughly 25% of this needs to be refinanced in the next 18 months.
The vertical scale is the amount of Credit Default Swaps (CDS) written by analysts that positively, absolutely told their investment committees that there was no way Italy could possibly default. Luckily, it would appear that the amount is much smaller than the folks at AIG (AIG) that positively, absolutely guaranteed subprime tranches that would never default. Nevertheless, any potential partial writedown of Italian sovereign debt will dwarf the effect of a Greece writedown. The stakes in Europe are high and nothing seems to have a reasonable chance of an easy mitigation.
So all you hedge fund and institutional money managers... you think you can take a vacation this summer? No debt ceiling solution? Sure you say, “That will be finalized a day before my Hampton rental starts August 1.” Positively, absolutely? Folks, you better be flat or hedged. The next eight weeks until Labor Day do not have the looks of a quiet summer.
Stay on top of the best financial news and commentary on Wall Street by following us @Minyanville.
The information on this website solely reflects the analysis of or o=
pinion about the performance of securities and financial markets by the wri=
ters whose articles appear on the site. The views expressed by the writers =
are not necessarily the views of Minyanville Media, Inc. or members of its =
management. Nothing contained on the website is intended to constitute a re=
commendation or advice addressed to an individual investor or category of i=
nvestors to purchase, sell or hold any security, or to take any action with=
respect to the prospective movement of the securities markets or to solici=
t the purchase or sale of any security. Any investment decisions must be ma=
de by the reader either individually or in consultation with his or her inv=
estment professional. Minyanville writers and staff may trade or hold posit=
ions in securities that are discussed in articles appearing on the website.=
Writers of articles are required to disclose whether they have a position =
in any stock or fund discussed in an article, but are not permitted to disc=
lose the size or direction of the position. Nothing on this website is inte=
nded to solicit business of any kind for a writer's business or fund. M=
inyanville management and staff as well as contributing writers will not re=
spond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.