Cart (0)
business newsEurozone Crisis Watch: Italian Bond Yields Spike Into the Danger Zone
By
Matthew Mallon
Nov 09, 2011 9:40 am
As Italy falls off a cliff, the question is who can save it?
PRINT
 |
|
The current yield on Italian 10-year bonds is 7.48%, up from 6.85% overnight. Scarier still is the short-term action, with two year bonds bounding 0.96 points to 7.11%, while the yield on treasury bonds due next year hit 6%. This, it turns out, is the real Berlusconi Bounce.
Analysts are struggling to estimate the cost of an Italian bailout. In one effort to grasp the size of the calamity, Gary Jenkins at Evolution Securities has added up the bills so far for the two previous Greek rescue packages, and the Irish and Portuguese bailouts (388 billion euros), plus the cost of European Central Bank intervention so far (74 billion euros), plus 50 billion euros of private sector costs and then multiplied it by 2.7 – the current Italian debt load of 1.9 trillion euros is 2.7 times that of Greece, Ireland and Portugal combined – to come up with 1.4 trillion, a figure that far exceeds the European Union's and the IMF’s pockets. It’s a deliberately crude and simplistic way of pointing out just how implausible any Italian bailout would be. The much-delayed and controversial refinancing of the European Financial Stability Facility – the one that cash-rich emerging economies in BRIC and elsewhere were supposed to help out with – would only have increased the EFSF’s funds to 1 trillion.
There simply is no mechanism in place to deal with the scale of this crisis. Traders are picking up signs of European Central Bank intervention at the moment, as the ECB dutifully does what is has been forced to do several times before, purchasing secondary market Italian bonds in what a London hedge fund manager told Reuters were “decent sizes.” But ECB intervention, while psychologically reassuring, is limited by EU law and offers no real cure, or motivation for those currently fleeing the eurozone debt market to return. In fact, the lesson many banks learned from the latest attempt at a Greek bailout is that the more ECB intervention there is, the more likely private investors are to face 50% haircuts when the inevitable happens, the debt collapses in on itself, and the ECB demands to be first in line. At this point, after two years of endless, escalating crisis and political dickering, ECB intervention may not even offer any real short-term relief.
What could calm things down? Well, for one thing, Berlusconi could go now, immediately. The markets are lusting after an emergency “technocrat” government to step into the breach, and the Italian leader’s typically fudged, wiggle-room statement that he would be stepping down soon, after his administration’s budget is passed, and, hey, maybe he’d call an early election is one of the reasons the market didn’t respond positively to news of his exit.
German Chancellor Angela Merkel, speaking around noon on Wednesday, spoke of possible changes to the European Union treaty – another can of worms, and hardly a quick solution, given that even the modest changes so far attempted have foundered. But could this re-ignite talk of eurobonds? The eurobond solution – in which peripheral eurozone economies would be able to borrow using the backing of stronger eurozone economies – is politically unpopular in said stronger economies, understandably. But it may be the only road out, other than a catastrophic dissolution of the eurozone entirely.
Meanwhile, back in Greece, which only last week seemed to be the center of the storm, signs are emerging that after a series of delays a new “100-day” government has been cobbled together to push through the latest bailout. Prime minister George Papandreou is expected to announce his resignation at 3 pm Athens time. If it happens, and this is by no means certain after days of farcical political manoeuvring, it will be a tiny sliver of good news in what otherwise promises to be a very bleak day for the eurozone.
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers 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 recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions 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 disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
