It seems like every day CDS on Italian bonds are going up. The German bond auction today was a disaster. If people won’t lend money to the Germans, why would anyone lend money to the Italians? Those Italians are sitting on 1000 tons of gold. Why don’t they collateralize their bonds with some of that gold? I’d much rather trsut gold than trust the Italians.
Why are you posting all these questions in the middle of the night? Are you drinking?
Yes. But I had fun.
“Those Italians are sitting on 1000 tons of gold. Why don’t they collateralize their bonds with some of that gold? I’d much rather trust gold than trust the Italians.” True. But why should I as an Italian for the same reasons as you cite give up my gold when I can hold others hostage. My sinking means that others sink. My asset will remain with me because it has “value” or at least others perceieve it as such. If the shit hits the fan, I have an economy that has the ability to produce stuff. I can go back to the Lira, albeit worthless, but can still produce and in time after much pain (no different than now) be independent and free. Perhaps the house of cards is beginning to fall.
I suppose there may be italian institutions with liabilities that - should the Euro fall apart - will probably be valued in lire. For those guys, maybe italian debt has an embedded call in it? Others may be betting on the idea that the Euro is so politically valued, that France and Germany will definitely rescue Italy, and so those higher interest rates can be held to maturity for an extra boost, particularly on short-term debt. They must figure that a forced haircut will still be small, if any. Finally, there are presumably index investors that have to buy it because it’s there, or because it’s too much of a pain to change the investment policy documents. But if rates are going up, clearly, many people are exiting that marketplace.
The CDS aren’t worth much are they though? They’ll just get round a default like they did with the Greek debt on a technical detail.
The odds of Italy defaulting on its debts have to be very very small. Italy is no Greece, it actually has a viable, working economy, albeit one that is growing at a snail’s pace.
Yeah but if it’s rates start rising, then its economy will probably decline, leading back to square one. Italian 10y’s are at like 7.34% now.
I think the purpose is to increase forum participation, since people keep complaining that there are too few new discussions. However, it would be funny if this was due to drinking… “Joey, I think you’ve had too much to drink.” “AAARGH! Increasing interest rates would have a positive influence on the current account!!!” “What?”
I don’t know the answer to that and I would like to know. Are the CDS now giving a lower estimate of expected loss on the bonds because there is this whole class of default that is cram-down voluntary haircut that doesn’t constitute default? ISDA needs to fix this because people ought to be able to transfer default risk.