Thanks to Holger Zschaepitz for this set of Tweets.
Silent Capital Flight
https://twitter.com/Schuldensuehner/status/1032629361814503427
EGB Credit Curve
Italy Debt Downgrade Coming Up
Italy 10-Year Bond Yield
Germany 10-Year Bond Yield
Theory vs. Reality
In theory, there is zero default risk on Eurozone sovereign bonds.
If that was the case, German 10-year bonds and Italian 10-year bonds would have the same yield.
In practice, the bond market says the spread between German and Italian 10-year bonds is 275.5 basis points (2.755 percentage points) and climbing.
For now, capital flight shows up in interest rates, spreads, and Target2 balances rather than a full blown crisis of some sort. How long this can continue is anyone’s guess.
Risk High and Rising
I discussed this setup twice recently.
- July 12, 2018: Eurointelligence Displays Stunning Ignorance Regarding Target2
- August 4, 2018: Debate Over Target2 Continues: Twilight of the Euro
Bottom Line
Claims that none of this matters and that there would be no consequences if Italy left the Eurozone and defaulted are more ridiculous as ever.
The harder people attempt to come up with reasons that none of this matters, the sillier they look.
The bond market is talking. Who’s listening?
Mike “Mish” Shedlock
There’s an old saying…
If you owe the bank $100 and can’t pay, you have a problem.
If you owe the bank $1 million and can’t pay, they have a problem.
It’s in the best interest of everyone in control that Italy avoids a crisis. Italy’s economy is far larger than Greece’s. I think it’s 10x larger. If Their economy tanks because of austerity, it may bring down the entire EU with it.
I took a look a the 5 year chart of the Italian 10yr yield. The Elliott wave patterns are screaming, “LIFT OFF”. I would not be surprised if yields broke 4.5 or 5.0% by the end of the year.
This is what happens when a political ideology takes hold with no respect for the consequences along the path to the desired outcome. The EU/Euro zealots will consider what happens next as a necessary right of passage towards one Europe.