Igor wanted me to share my thoughts on Italy, one of the 5 PIIGS. Of course, this is all serious stuff. Ultimately, the debt situation here and in Europe can lead to severe credit issues. We all remember what it's like when the capital markets "freeze up" as they did in 2008.
Italy is scary because it is relevant, while Greece really is an odd-lot. Greek finances are significantly worse than Italy's - they had to have debt relief. Italy, on the other hand, has a stable economy and not nearly as big a debt problem.
Italian bonds are losing value, partially because CDO protection was realistically eliminated when it failed to trigger when Greece "restructured" rather than "defaulted". Another issue is that banks are dumping the debt to avoid higher capital charges. Clearly the straw that broke the proverbial came's back, though, was the increased margin charges to hold Italian bonds (yesterday). It is said that Europe doesn't have the ability to bail out Italy, and I believe that is true. Fortunately, it doesn't need to bail it out. What is necessary is reduced public spending. Their debts are big but not piling up rapidly. Greece was bankrupt, but Italy is not. Of course, the higher the interest rate, the more challenged their budget becomes. They have about $400 billion rolling over next year, so each 1% hike in rates costs about $4 billion in extra interest charges.
Bottom line is that Europe continues to have problems, but they aren't likely to lead to financial contagion.
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