The Italian Debt: Bonds With Benefits?

By Andrew Butter

No sooner was a “deal” (of sorts) structured for Greece than the vultures turned their attention to Italy, and the familiar double negative feedback loop started.

First the cost of insuring Italy’s debt via CDS nearly doubled in a week, then the yields went up (of course), then the rating agencies started to fret about whether or not they might have missed something (again), so talk started about downgrades, so investors who are obliged to have a certain quality of debt in their portfolios started to sell, so yields went up, so CDS spreads went up…round and round. (See Chart added by EconMatters)

Italy's CDS Rose to A New Yearly High

Chart Source: DailyCapitalist.com (Added by EconMatters)


Good time to buy

1. Total Italian debt burden (private plus public) is 250% of GDP (compared with over 350% in USA).
2. Granted the public debt is 120% of GDP, but over 50% of that is owed to Italians living in Italy; hardly a flight-risk. (See Chart added by EconMatters)
3. Net external liabilities are 15% of GDP compared with more than 100% for Portugal and Greece.
4. The country makes things, it has tourism and it has opera, and food and football, and guys who live with their mom until they get married, and until recently its trade deficit was negligible (goods + services). Right now that’s about 2% of GDP mainly due to having to buy oil on the spot market to replace oil traditionally supplied by Libya. By comparison, USA’s trade deficit is about 3.5% of GDP (last four quarters). 

Chart Source: DailyCapitalist.com (added by EconMatters)

Let’s see, what’s going against Italy right now is simply that the “insurance” market for debt has put Italy in its cross-hairs. Which brings into question whether the world should be dictated to, by an elite that unilaterally decides the valuation of debt, and has the power to bring down whole countries, or whether those guys should be simply closed down.

Italy will be the “bridge too far” for those who seek to mess with the fundamentals, and it’s about time. Prediction: Italian 10-Year debt will sell for less than 4.0% in one year’s time.

Let’s see if that one is as accurate as the prediction of 2.89% for the US Ten-Year made last December, watch this space next August 1st.

See the original article >>