Investors dump Italian bonds as bailout worries rise

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Investors dump Italian bonds as bailout worries rise

Post  sumtwo on Wed Nov 09, 2011 7:10 pm

A bailout of Italy, once unthinkable, is suddenly Europe’s next big worry.

Italy’s borrowing costs surged to distress levels Wednesday, pushing Europe’s debt crisis to a dangerous new phase and raising troubling questions about the euro zone’s ability to backstop its third-largest economy.

Investors dumped Italian bonds en masse amid fast-rising fears about the country’wholesale jerseyss ability to manage its massive debt load. The yield on Italy’s benchmark 10-year bonds vaulted more than half a percentage point to 7.4 per cent – a record high since the launch of the euro 12 years ago. Yields that high are considered catastrophic because they make financing a country’s debt unaffordable. Greece, Ireland and Portugal all required bailouts not long after their yields breached 7 per cent.

Heightened worries about Italy’s finances came a day after Prime Minister Silvio Berlusconi lost his parliamentary majority and vowed to resign once the country passes a law in a few days to enact economic reform measures – an accelerated schedule brought on by the jarring collapse in confidence among investors in Italy’s debt markets.

The deepening debt crisis is beginning to infect France, where bond yields cheap mlb jerseys also climbed. The spread between French and German bonds hit a record 1.46 percentage points.

If a bailout of Italy is needed, no one knows where the money would come from.

“Italy’s financing needs are more serious [than Greece, Ireland and Portugal, the three bailed-out countries]. Italy accounts for almost a quarter of all the outstanding euro zone debt, and it has the most demanding refinancing schedule of any euro zone country in 2012,” said Rob Carnell and Chris Turner of ING Financial Markets Research.

At €1.9-trillion ($2.6-trillion), Italy’s debt is 120 per cent of gross domestic product, the second highest on the continent after Greece.

Worse, a formidable amount of it comes due shortly. Next year, Italy must roll over more nfl jerseys cheap than more than €300-billion. Over the next three years, the financing needs could be as high as €650-billion, Société Générale says. If soaring yields banish Italy from the debt markets, financing will have to be found another way.

The trouble is that the EU’s bailout fund, the European Financial Stability Facility (EFSF), currently has only €440-billion of borrowing power and the bailouts of Ireland and Portugal have already drained about half of it. There are plans to boost the EFSF’s firepower to €1-trillion or so, but finding investors has proven difficult; the EFSF’s effort to sell €3-billion in bonds to help Ireland ran into trouble last week.

Some economists think that the European Central Bank itself is making the Italian debt crisis worse, noting that the ECB, which had been buying Italian bonds with alacrity in the summer, is buying only small amounts, in effect allowing their yields to rise. In a note published Wednesday, James jerseys wholesale Nixon of Société Générale noted that the ECB is reluctant to mix monetary and fiscal policy by buying the sovereign bonds of debt-swamped countries.

“This is a dynamic we have seen before and suggest behind the scenes the ECB may already be pressing Italy to accept external support,” Mr. Nixon said.

With the EFSF in doubt, the ECB might have to get over its fear of buying large quantities of sovereign bonds to provide market liquidity and bring yields down. France has argued that the ECB, which can print money, should become the lender of last resort. “In this environment, there appears to be little market for Italian debt apart from that bought by the ECB,” Mr. Nixon said. Germany, however, opposes ECB bond purchases. Unless the ECB changes its stance, Italy will face its toughest ever financial test.

Italy does not have a budget deficit problem; at about 4 per of gross domestic product, its yotoforum deficit is among the lowest in Europe. It has a primary budget surplus (the surplus if interest charges are stripped out).

But fear of “haircuts” – reductions on the value of sovereign bonds held by banks – is scaring the market. “It’s hard to see how anyone with fiduciary responsibility can buy Italian debt or any other member-country debt after EU officials announced plans for 50 per cent haircuts on Greek bonds cheap jerseys held by the private sector,” said Denver hedge fund strategist Marshall Auerback of Madison Street Partners.

LCH.Clearnet, the European bond clearing house, could take some of the blame for the soaring Italian yields. It made the country’s bonds more expensive to trade by raising deposit demands. But LCH was merely pouring some gasoline on an already raging fire lit by the political vacuums in Rome and Athens, bank stress as capital requirements are lifted and signs that the euro zone is plunging back into recession as confidence evaporates and ubiquitous austerity programs crunch growth.
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