Italy Enters Debt Crisis High Bond Yield Danger Zone?

By: DK_Matai

1. Equity markets euphoria notwithstanding, Italy could yet drag the Eurozone and world financial markets into a new and formidable out-of-control crisis;

2. Even if Berlusconi goes, it is unlikely that any parliamentary consensus will emerge in the short term to cut Italy's massive debt and boost growth;

3. There is no agreement amongst the political parties on either a national unity or technocrat government to get Italy out of the mess it finds itself in;

Italian 10-year bond yields

4. Yields on Italy's 10-year benchmark government bonds spiked close to 7 percent on Tuesday, a sign that markets are questioning the country's ability to service and pay its debt;

5. The spike in Italian bond yields resulted in a spread of almost 500 basis points to German bunds;

6. Italy's government debt bond market is the third biggest in the world, behind the US and Japan;

7. Italy is reaching the point where Greece, Ireland and Portugal were forced to seek a bailout from the IMF and EU;

8. Increased European Central Bank (ECB) bond buying, albeit within a limit, has so far failed to halt the spike in Italian bonds yields;

9. Italian bond yields are now at that dangerously elevated level from which no other Eurozone government bond market has ever recovered;

10. Unlike Greece, Ireland or Portugal -- all of which received financial lifelines -- Italy has too much government debt of nearly two trillion euros -- to be rescued by its European neighbours;

11. Given the Eurozone's inadequate bailout facilities, many argue only an unlimited ECB commitment to buy Italian bonds can prevent the debt crisis spiralling out of control;

12. ECB has repeatedly said it has no mandate to act as lender of last resort to countries. To do so would break European law;

13. New ECB President Mario Draghi has stressed the ECB's bond buying is limited and temporary; and

14. Italy has the third-biggest economy in the eurozone and its debt worries are a huge threat in the wider crisis facing Europe's single currency.

Conclusion

Bond market yields can cross a point of irreversibility and after breaching that point-of-no-return, the cascade of selling accelerates. Has Italy entered that danger zone?

What are your thoughts, observations and views? We are hosting an Expert roundtable on this issue at ATCA 24/7 on Yammer.

By DK Matai

www.mi2g.net

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