Monday, November 28, 2016

Italy More Likely To Exit Eurozone Than Greece As Italian Bond Collapse

by Phil T Looker, 28 November, 2016

We said in September, when the world had returned from its summer vacation, that after the shock Brexit vote in which the British public voted by a slim but significant marging to quit the EU that the in the race to be next out of the EU exit door and first to leave the Eurio single currency was truly on and Italy was leading by a distance.

Since then things have just got worse and worse for the globalists and recent news that Italian bond yield were surging confirmed our impression. People not familiar with bond trading jargon might think that surely it is a good thing if yields are surging. Not so; bonds are what national treauries sell to fund their deficits and capital spending. Each bond has a face value in $ £ or € one thousand units. The bonds carry a fixed interest rate (coupon value), usually 3.5% for UK bonds. The yield is a bit more complex. Central banks underwrite bonds by buying them from the government at face value (the Bank Of England is not actually owned by the government, a fact which surprises many people).

The central banks then try to sell on the bonds at face value. Occasionally, if a currency is considered rock solid bonds may sell above face value. Usually the selling price is lower. The yeild therefore is the real rate of interest, calculated by working out the interest rate paid by the coupon value as a percentage of the actual price paid. I should point out here that bond markets deal in basis points, rather than percentage points. A basis point is one hundredth of one percent. How can they make a profit on such small margins? Work out for yourself a hundredth of one per cent of a billion in Dollars, Pounds or Euros. Not a bad days wages it it?

So when news reports say bond yields are surging, it means bond prices are collapsing. OK, what of Italy and why is the Eurozone debt crisis back on top of financial news and about to flood back into main news?

It is no longer Greece, but Italy which is now the country that is most likely to leave the Eurozone within the year if the markets are telling the truth (and they usually are). Commenting on the collapse of Italian bonds, Sentix Global Investor Survey writes: "This development underscores the importance of the referendum to the Constitution in Italy on December, 4th."

Sentix adds that while it looked as if a "castle peace" had been concluded a few months ago, the euro concerns are gradually rising again among investors. But this time it is not Greece that dominates the agenda. Although for example the pension funds in Hellas are collapsing, the euro exit probability has fallen to 8.48% - the lowest level since 2014.

Italy is now the focus country number 1 in the Eurocrisis! The precarious situation of the Italian banks, the political questions surrounding the Constitutional Treaty at the beginning of December, and the economic turmoil of the past have placed the country at the centre of this latest chapter in the Eurozone's ongoing financial crisis.

With the Italian referendum on constitutional reform due on December 4, and the 'NO' campaign currently leading in polls. The political risks of the likely NO vote and the stuttering economy, combined with the precarious state of many major Italian banks is fuelling uncertainty. And the likelyhood that if the government loses the referendum the Italian government will fall and anti EU parties will dominate the next governing coalition in Italy all makes what has been dubbed as Quitaly look more likely.

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