who is attacking italy's bonds? , page-14

As of May this year, exposure of various euro area banks to PIIGS debt in graphical form, via Business Insider. The Italian banks themselves are of course the most exposed to Italian government debt. The total amounts involved are staggering:

"Since the 1970s, the Italian Government has consistently lived beyond its means and public debt has risen to around 115 percent of GDP - broadly in line with the Greek ratio. And since joining the euro, Italy has steadily lost competitiveness," Bootle wrote. "We think that it might take a decade or more of stagnant or falling wages to restore full competitiveness." The only chance of Italy getting its debt-to-GDP ratio below 100 percent would be for it to run a budget surplus of 5 percent over 15 years. "If doubts grow over whether the Government is willing or able to do this, Italy could fall into a so-called 'debt trap.' Under this scenario, rising borrowing costs lead the debt-to-GDP ratio to increase at an accelerating rate, leaving the Government with no choice but to default."

"If the Government were to default on its debts and investors were forced to take a large haircut of say 50 percent, this would wipe out around 80 percent of Italian banks' tier one capital at a stroke, causing domestic financial market meltdown," he said. Bootle said foreign investors would face losses of around 400 billion euro. "Uncertainty about exactly which banks were worst affected would almost certainly lead to the seizing up of interbank lending markets and could prompt another deep global recession,” he said."


The problem S&P has highlighted is a serious one. Similar to the other members of the PIIGS stable, Italy has lost its competitiveness. The country was a serial currency devaluation perp before it joined the euro. Now it can no longer do that and its 'growth' prospects have diminished commensurately. We are putting the term 'growth' in quote marks for a good reason - the economic growth that is recorded as a result of devaluation and inflation is entirely illusory. The root of the problem is certainly not that Italy and the remaining PIIGS now share a single currency with the likes of Germany. It is the conceit that the monetary policy of all these countries can be centrally planned and managed by a single bureaucratic entity is now finally blowing up in everybody's face.

http://www.acting-man.com/?p=7724