Thursday, 4 August 2011

Italy in pre-bailout talks with the EU, Cyprus could be next?

The Italian government has had talks with the EU about rising bond prices and the possibility it might not be able to finance itself out of recession.

Emperor Barroso has once again attacked the international credit rating agencies - Standard & Poor, Filch and Moody's - for not covering up the risk of lending money to eurozone countries.

The higher the risk of full or partial default on bonds, the lower the credit rating a country will get.  The lower the credit rating, the higher interest rate investors will expect on bonds.  The higher the interest rate, the more it costs the country issuing them to get some (relatively) short term cash.

Italian and Spanish 10 year bonds are attracting yields of just over 6% which is on the line between affordability and unsustainability.  Much higher and it's going to become too expensive to borrow on the bond markets and they're going to have to go cap in hand to ... well that's the problem, there isn't enough money to bail out either Italy or Spain, let alone both of them.

Italy's national debt (not including the hidden extras like pension liabilities and PFI) is 120% of GDP and corruption is rife at all levels of society - if Silvio Berlusconi didn't have immunity from prosecution as president, he would be in prison now for fraud and corruption.  Large parts of Italy are under the control of the Mafia who steal billions of euro of public money.  S&P, Moody's and Filch are damn right to consider Italy a risk to investors - they don't have enough money to pay their bills and what money they do raise through taxation is pillaged mercilessly by the Mafia.

And I wouldn't normally link to the communist rag, the Guardian, but they are leading with the story that Cyprus is now top of the list of contenders for the next bailout.  A few billion for Cyprus will take even more money out of the theoretical bailout fund making a bailout of Italy or Spain even more improbable.
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