The Tipping Point for Italian Bond Yields

Hysteria has returned and analysts are running around declaring Euro-doom. Not a rare thing these days but calmer heads should prevail and appropriate analysis shared. Now, for Europe and the euro, its all about Italy. No surprises there as Italy has been on the radar of European leaders as a ‘worst case scenario’ yardstick for months. Effectively, we’re entering the ‘we’re all screwed’ area of European economic diplomacy. Its becoming too late to make the decisions that should have been made when the sovereign bailouts began with Greece in May 2010 (nearly 18 long months ago).

Berlusconi’s Bond Yield Boom

So, Italian bond yields are rising sharply. We all know why this is. First, and foremost, the ECB were actively engaged in frantically buying Italian bonds to keep the yield rate artificially low (to buy the politicians time to come up with a lasting solution…which hasn’t happened). Secondly, and most recently, politics has intervened with Berlusconi’s eventual resignation becoming the key issue…and the likely ‘headless chickens’ election clamour that will succeed his stepping down as PM. Italy isn’t exactly an exemplar model of stable European governance (it has had 62 governments since the end of WW2 – effectively 1 a year). Most Italian PMs rule with a shoestring majority and shifting coalitions with their tenures usually ended before any real ‘governance’ takes place. Berlusconi won an outright majority in 2008 (but has been beset by underage sex scandals and corruption allegations leveled at the billionaires media empire). All this makes for fascinating innuendo and tabloid headlines but nothing for steering Europe’s 4th largest economy (Worlds 8th largest) during a very challenging economic environment.

In a previous in-depth PIIGSty musing , we assessed the ‘tipping point’ for requesting EU-IMF bailouts at around 7-10%. This is the danger zone.

How does Italy fare? (November 9, 2011)

You can see why (purely simplistically) why European leaders are starting to get extremely nervous. Italy, with €1.9tn of sovereign debt is over 7.5 times the ‘new’ level of Greek debt of €250bn after the October 27 Agreement. Italy is also ‘too big to rescue’ under the current €440bn EFSF fund. Even with IMF help, Italy appears a bridge too far. Europe has dithered and participating in reactive patchwork decision making and ‘sticking plaster’ solutions for the past 18 months.

Time might have just run out.


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