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Looking For Black Swans In The Eurozone's Infirmary

I thought that this might be a good time to take a quick look into the eurozone’s ICU to see how the PIIGS are doing. My particular interest is in identifying any countries that look likely to blow up this fall. I will review the PIIGS in the order of their current Moody’s bond rating, from highest to lowest.

Italy
(Baa2/Negative Outlook. Barely eligible for investment grade portfolios. Bonds at 5.1% trade as a Baa3.)

Italy is the Big Enchilada of the PIIGS. As a major economy with EUR 2 trillion of debt, it is way too big to be allowed to default. However, refinancing a debt burden on that scale cannot be handled by the EFSF/ESM. It would require the full resources of the ECB, and then some.

Italy’s bond yield has been quite volatile. It was as high as 7.2% last fall. Since the OMT was announced, it has fallen to 5.1%, which is still too high.