Monday, November 7, 2011

The PIGS are choking on their own slop (plus Italy government bond yield update)!

Breaking News (November 7, 2011 2:40 PM): Italy 10-year government bond yield breaks higher to 6.66%!

That's if slop is a euphemism for massive amounts of debt and out of control government spending that includes cradle to grave entitlements!

The rhetoric out of the G-20 and the political games in Greece are smokescreens for what will ultimately matter: EU sovereign bond yields!

Because at the end of the day how high are the interest rates, for governments with massive amounts of existing debt and an unending need for new debt and who rule over stagnant or declining economies, going to be as dictated by the markets?

In other words at what point will increasing bond yields demanded by investors for purchasing debt from certain issuers like Italy or Spain beget even higher bond yields resulting in the cost for these countries to service their debt to spiral even further out of control and into a so-called death spiral?

What's the world to do or better yet, what can the world do?

Round and round she goes, where she stops, nobody knows!

This chart of current bond yields from around the world also shows how much more most other country's need to pay for borrowing money than Germany and the U.S.

The greater the spread between a country and Germany or the U.S., the riskier the debt is considered to be. Look at Italy with sovereign bond yielding over 6% which is over 450 basis points higher than that of German 10-year bonds yielding 1.84%.

Is this type of spread for borrowing money in country's like Italy sustainable?

For comparison purposes on June 1, 2011 the Italy 10-year bond was yielding 4.74% and Germany's 2.99%. In the time period from June to now German 10-year bond yields have dropped by more than 100 basis points while the 10-year bond yield in Italy has risen about 150 basis points. (FT)

This is not sustainable but again, what can the world do?

(click on chart to make bigger)

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