Saturday, November 5, 2011

More Trouble Over There . . . Italian Version

The chart at left shows the yield on the ten year Italian bond. It is at a Euro era record, and it is now a record 4.57 points higher than the German bond. The market basically finds these bonds to be very risky and so the market demands a huge premium for investment. This premium stands even though the European Central Bank purchased 70 billion Euros worth of Italian bonds in an effort to create a firewall between Greece and Italy in the event of a Greek default. Today, the ECB publicly threatened to halt such purchases. All of this means the bailouts are not working and the firewall around Italy has failed to contain the imminent Greek default. Meanwhile, neither Italy nor the G20 seems likely to take any significant action to address underlying Italian debt problems.

Greece is toast, and the only issue remaining is the extent of the default. Political chaos reigns in Athens and apparently the bailout requires a super majority approval of 180 votes in the Greek Parliament. Today, this appears dubious at best. Even if these hurdles can be overcome, the deal on the table is problematic at best, as developing nations like China balk at adding to the Eurozone bailout while France and Germany seem to have reached their political, economic and financial limits. The bottom line is that further bailout funding appears unlikely.

This is all unbelievably bad. Economists like Nouriel Roubini now see a significant risk of a Eurozone blow-up, with global financial markets following. On Sept. 24, I saw unlimited downside. Today, despite repeated efforts by everyone, the Eurozone situation is even worse. That is precisely what the above chart is saying.

Since Sept. 24, some degree of clarity regarding US exposure emerged. According to the Congressional Research Service the US financial sector has at least $641 billion in exposure to problematic Eurozone debt and $1.2 trillion in exposure to European banks. This also can only be termed bad news. If a Eurozone meltdown strikes, the US will get badly burned.


  1. I am really surprised that the Eurozone meltdown has not already occurred. One has to wonder how many times can a single nation be "bailed out." It seems as though there is a meeting/summit every other week that is suppose to make all of this appear as though it never happened. Subsequently, the markets explode higher only to realize the next week that nothing was actually resolved and that whatever agreements were reached will not be sufficient. It very frustrating from an investor's standpoint because it is practically impossible to enter the market with any degree of confidence.

    I believe that Italy will likely be the next Greece. It has been known for over a year that Greece was not the only European nation in trouble. Italy, Ireland, Spain, and Portugal are all on that list too and most of their debts are held by France and Germany. Italy is the third largest economy in Europe; therefore, if it goes then the downside really is limitless. Roubini's outlook on the U.S. economy is almost always negative; however, there is little to be positive about currently. At some point, those nations coming to the rescue of countries like Greece will either be unwilling or unable to do so. I feel as though the time is fast approaching where the can will no longer be able to be kicked down the road. Could this mean Lehman times ten?

  2. I personally would be surprised if the meltdown came in 2012, rather than 2011. And, yes, it is very difficult to invest with confidence as long as the megabanks are insulated from the risk and consequences of failure. They seem to simply stumble from crisis to crisis, with little concern for the adverse consequences of their recklessness. I predict an AIG out there--CDS exposure to Europe will almost surely sink at least one megabank.

    They may have miscalculated this time. They may have pushed the envelop on TBTF so far, that now they are too big to save.

    There is no way any sovereign on earth could pull off the massive rescues of 2008, today.

    More to come on this optimistic (although terrific or even horrific) ray. . . .

  3. What can you say? When a company makes bad financial decisions credit markets appropriately require higher yields. The only shocking thing about Greece, Italy, and probably several other European countries soon, is that it took so long for markets and political leaders to realize that their fiscal policies were unsustainable. Perhaps countries should have Basel requirements as well.

    Unfortunately, like Steven I feel the biggest risk to the world economy is the over exposure of banks to European sovereign debt. Only developing countries with their massive savings could possibly save the day. Unfortunately they don't seem inclined to bailout the Euro states. Maybe it's time for Europe to take a long hard look at reform.

  4. Natasha__Memphis LawNovember 23, 2011 at 12:56 PM

    Ramirez stated,"If a Eurozone meltdown strikes, the US will get badly burned." This has happened, and American investment in European bond debt did damage investment portfolios.

  5. I really can't blame the emerging nations for not wanting to get involved. We got involved and looked what happened to us. Money has poured in and yet the situation has not been salvaged. It seems to me that it is not more money that is needed but rather major reform with other countries taking notice.

  6. Franklin A (Memphis Law)November 28, 2011 at 9:23 PM

    It will be interesting to see how the Euro emerges from this crisis. New countries will likely not admitted into the Euro-zone for the foreseeable future and how long can France and Germany tolerate economic interdependence with Italy, Greece, and Spain?

  7. Salwa (Memphis Law)November 29, 2011 at 4:28 AM

    As many have warned, a meltdown of the eurozone will affect the United States as well as the rest of the world with the possibility of another recession. As Tilford said “Investors will flee to the US, causing the value of the dollar to rise, making US exports more expensive around the world and causing their sales to fall.”

  8. Gray N. Memphis LawNovember 29, 2011 at 8:45 AM

    This looks like another example of the United States stretching itself too far in trying to contribute funds to another country. It is understandable that the U.S. would try to help out with the Eurozone Meltdown, but pouring hundreds of billions of funds into the European market is not the solution. The United States should help Europe reform many of their financial policies instead of wasting money we need back home.