Nov 3, 2011

Giant Sucking Sound...

First they create European Civilization, then some 2500 odd years later, destroys it. Ah, to be fair, they're just the first domino to fall.

In anticipation of a coup, Greece's prime minister fires all head military leadership

But if you're not scared - you will be. See it isn't Greece. It's not even Spain or Ireland. It's Italy.

Italy's been walking around with 1.9 trillion in Euro debt (120% of GDP), so that's roughly 5.3 times larger than that of Greece, and is quickly approaching a situation where its debt will never fall below 100% of GDP without a default/debt restructuring. Its current 10-year bond yield is 6.25% and rising, meaning creditors are demanding about a 4.5% premium over German bunds to buy their debt. If that bond yield spirals out of control, Italy will not be able to pay the interest on debt + maturing principle + non-discretionary spending. Hey, maybe they've got some land or some paintings they can sell?

So, there's a lot of folks buying Italian bonds to keep the yield in check, but it's the ECB, and that tells you that there's trouble.  They are trying to bide time until conditions improve and more buyers step up. But if Europe - and Italy - can't convince the secondary bond market that Italian bonds are a good investment, and yields keep rising, then the ECB will eventually give up and some type of default/debt restructuring will have to take place. How much you think that Leonardo's worth? You know, after depreciation an' all?

Let's put an Italian default into a context that we can wrap our heads around, Lehman Brothers was around a $600 billion default. Italy would be a 1.9 trillion Euro default. 4 X larger. Now, that's a big scary number - but then you have to start thinking about the collateral damage from the banks that will die left holding Italian debt.

THEN do it again with Spain, and Ireland, and then... you see a pattern yet?

If you're not scared, you will be. You will be.

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