November 9, 2011

Italy has reached a point of no return

To summarize the horrific state of things in Italy, below a summary of key points from Barclay Capitals following the announcement of LCH which has raised the charges effectively putting Italy in a death spiral.

Summary from Barclays Capital:
1) At this point, it seems Italy is now mathematically beyond point of no return
2) While reforms are necessary, in and of itself not be enough to prevent crisis
3) Reason? Simple math--growth and austerity not enough to offset cost of debt
4) On our ests, yields above 5.5% is inflection point where game is over
5) The danger:high rates reinforce stability concerns, leading to higher rates
6) and deeper conviction of a self sustaining credit event and eventual default
7) We think decisions at eurozone summit is step forward but EFSF not adequate
8) Time has run out--policy reforms not sufficient to break neg mkt dynamics
9) Investors do not have the patience to wait for austerity, growth to work
10) And rate of change in negatives not enuff to offset slow drip of positives
11) Conclusion: We think ECB needs to step up to the plate, print and buy bonds
12) At the moment ECB remains unwilling to be lender last resort on scale needed
13) But frankly will have hand forced by market given massive systemic risk

According the note below from the LCH website, deposit charges on Italian bonds will almost double effective close today (Wednesday November 9th). The details can be found here.

LCH Raises Deposit Charge on 10-Yr Bonds to 11.65% From 6.65%
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