italian bond yields @ 6.65%, page-14

I don't know why they do not treat it the same as the international debt crisis that occurred in the 1980's with in particular South American Countries. From what I remember of that time, the debts were rolled over and held by the same institutions that held the debt previous to maturity. If the bank wished to disposed of these debts it then sold them on the international market which sometimes sold for half the face value of the debt.

In the case of Italy, when a 10 year bond matures then Italy must redeem the debt probably by issuing more debt. the way I see it there are there possible sources of raising thsi additional debt:

1. From bailout institutions (IMF, ECB, etc) who provides the funds to italy to repay the bond holders;

2. From independent banks who provide the funds to Italy to repay the bond holders but demand a high rate of interest to compensate for their increased risk of default; or

3. The bond holders themselves. Effectively you roll over the due bond debt by issuing new 10 year bonds to maturing bond holders. The implicit initerest rate on the bond should be the standard Europian rate for 10 year bonds. Because the international market value these bonds using a higher risked rate of return they will have a value on the open market less than their face value. However, it should be up to the individual bank to then decide if they want to take a haircut and sell the bond at the discounted rate or not;

These bailouts from independent institutions are just allowing banks, who have made in the past bad loans/investments to recover their losses by transferring the debt to the indepentent institutions;

If they did this then the problem then become of restructuring Italy's fiscal position such that future borrowing requirement is less than zero or is reasonable.

While there is a prospect of default and a prospect of bailout from a more credit worthy independent institution I would have thought all bond holders would be looking for a rollover increasing the size of the problem.

I say let Italy restructure its fiscal position to a more sustainable level but I also say that existing bond holders should have their maturing bonds rolled over with similar term bonds with normal interest rates. If the bond holders want to sell the bonds on the market at a discount then that is their decision.

Regards


SP