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Italy Getting the Boot

Wednesday November 9th, 2011   •   Posted by Craig Eyermann at 8:49am PST   •  

First, it was Greece circling the drain. Today, it’s Italy that’s getting set to enter the national-debt death spiral. Via ZeroHedge (original source misspellings not corrected):

Euphoria may have returned briefly courtesy of yet another promise for a resignation that will likely not be effectuated for weeks or months, if at all, and already someone has done the math on what the events in the past several days reveal for Italy. That someone is Barclays, the math is not pretty, and the conclusion is that “Italy is now mathematically beyond point of no return.

Summary from Barclays Capital inst sales:

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

Hint: Not Good. Sell EUR, Buy Gold

The broader referenced report can be found here.

Map of Italy - Source: CIA World Factbook

We won’t comment upon the quoted advice to sell euros and buy gold, but what Barclay’s insider is describing is very similar to the trajectory that the United States can expect to find itself upon given its current debt-financed government spending binge, although here, it’s likely the Federal Reserve (the U.S.’s central bank) will be willing to be the lender of last resort, which will change how some of the dynamics play out.

If it helps, think of what’s now going on in Europe as the opening acts for what might happen here unless the federal government gets its collective act together and reins in its spending. There’s still time for “austerity” (aka: restraining U.S. politicians to “realistic” levels of spending) and economic growth to work on this side of the Atlantic.

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November 2011