Italy’s 10 year has had a significant move year to date.
A 140 basis point move in less than 3 months.
What is debt sustainability? When more than 10% of central government revenue goes to interest payments trouble is ahead. Italy’s revenue is $800 billion euros. Its interest payments are $93 billion euros. 11.6% of Italy’s revenue goes to interest payments. As interest rates rise more revenue is consumed by interest. This is the problem that all western world nations face.
The die has been cast. There is no way out besides a default. There is nothing holding back the flood gates except the psychological component. It is the qualitative perception of the market participants.
Lehman senior secured bonds traded 400 basis points over treasuries a week before they went bust. Investors did not think Lehman was going to go bankrupt. The psychological changed rapidly.
We do not know the degree the ECB will intervene to postpone Italy’s crisis. They may be able to kick the can a few years. Again, it is the qualitative perception. The bill will come due one day. It is wise to have lots of cash on hand and avoid government bonds at all cost.