Italy bond prices get closer to nightmare 7 per cent

12th July 2011

It writes: "Plunging prices for trading in Italian debt presented Brussels with a nightmare scenario: The potential bailout of the third-largest economy in the euro zone could be unaffordable and could result in the destruction of the common currency.

The Canadian website also notes that Italy's economy is as big as Britain's and bigger than Canada's and suggests that most economists think it would be too big to bail out.

In the UK, the Daily Mail suggests that the UK has a £43bn exposure and notes that among British banks Barclays has suffered most to a large exposure.

The yield on Italian bonds has climbed from 4.62 per cent to 5.55 per cent in five weeks. Economists and bond market analysts believe that 7 per cent is often the trigger figure when countries may have to seek a bailout.

 The Globe and Mail quotes Gary Jenkins, a fixed-income analyst in London with Evolution Securities saying: "What would keep me awake at night if I was a European finance minister is that we are only about 2 per cent away from a potential disaster scenario."

Bloomberg reports in more detail on markets here and quotes Andrew Bosomworth, head of portfolio management at Pacific Invesment Management saying: "Over time, Italy cannot afford to pay the interest rates it is paying right now. Its debt is unsustainable if we project into the future these sorts of interest rate levels. We do need something to change, be that a policy response or a change in attitude in the markets?"

The Italian situation sent shudders around Europe.

The Irish Times, the paper of record in Ireland, and of course one of the bailout recipient countries, believes the system is now unravelling.

Here is its take on the problem's domino-like qualities: "Greece needs a new bailout but Germany, Finland and the Netherlands won't sign up for that until private creditors agree to a substantial contribution. Plans are advanced but severe warnings from rating agents follow, raising the threat of default rating on Greece, something the ECB opposes due to contagion risk. That very danger proves real as EU leaders debate pushing ahead regardless with a plan that may lead to a selective default. Pressure on Italy and Spain inevitably follows.

"Every brittle link in this chain is prone to failure, although it seems obvious now that serious contemplation of the default option should open the door to fresh discussion of less severe options. This helps explain why discounted bond buybacks by the rescue fund are again on the table, but will do nothing to appease anti-bailout dissenters in Berlin, The Hague and Helsinki."

Mindful Money's star bloggers have also been debating the issue. Here Shaun Richards wonders why Britain is benefiting from a flight to quality. Writing today he says: "What these events are telling us I think is another aspect of contagion which is fear and panic where rationality can get and indeed is being suspended. Please do not misunderstand me Italy has serious problems with the high debt – low economic growth theme I described yesterday but in a rational world this would increase worries about the UK (and US) and not lead to an apparent reduction in them as measured by bond yields."

Henderson's chief economist Simon Ward looks at the money supply fundamentals.

 "Italian government bonds have come under pressure partly because the country's economic recovery has ground to a halt, as reflected in very soft June purchasing managers' survey results. (Italy's composite PMI fell to 48.4, below the 50 break-even level and lower than Spain's 49.2.) As usual, economic weakness was signalled six months in advance by real narrow money, which started to contract in late 2010."

See also: Are Italy's banks really in a perilous state?


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