Why Pillaging Alpha From Italy’s Yields Might Not Be So Easy


  • 7% rate on all debt would cost just EUR140B
  • Italy projects it will collect c. EUR500 bln taxes in 2012
  • Italy’s Total Debt Scenario Relatively Tame
  • Italian household debt is about 40% of GDP
  • Risk/Scope for Financial Repression

Some factors for seekers of ‘alpha’ to bear in mind about Italy, where newly-installed techno-warrior Super Mario works to form a government.

[Alpha. From bond yields.]
Italy’s average debt maturity is a little above 7 years and that’s among the longest in the euro zone. This coupled with its large stock of existing debt suggests that the rise in average yields will take some time to filter into Italy’s real debt burden.
7% rate on all debt would cost just EUR140B
The 2012 budget assumes Italy’s debt servicing costs of about EUR85 bln.
In theory, if Italy were to pay 7% on all its circa 2 trillion euro debt, that would cost about EUR140 bln.

Italy projects it will collect c. EUR500 bln taxes in 2012.
That still leaves quite a cushion if the debt servicing estimate is too low and tax collection were to be high.

Italy’s Total Debt Scenario Relatively Tame
Let’s also think about the complete debt picture – not just sovereign debt. Public and private debt do have an interface, especially in Italy.
If both broad debts were combined, Italy’s overall debt would still be amongst the lowest in the OECD.
Further, Italian household debt is about 40% of GDP.
This compares with a European average of closer to 75%.
In the US, household debt is near 90% of GDP, having peaked close to 100% in 1Q09.
Italy’s government debt is about a quarter of household net wealth.
Finally, the term and implications are horrible, but we need to also touch on Financial Repression
Arguably, the fact that US nominal yields are said to have pushed real yields well below zero, is a form of FP.
However in Italy, financial repression could hypothetically, cut much deeper.

Domestic accounts own about 55% of Italy’s government debt.
That affords, for instance, such measures as bond swaps being foisted on ‘domestic institutions.’
Similarly, domestically-focused institutions [for instance pension funds] could be required to hold more government bonds in pension portfolios.

OK, one more thing – a side issue really, as the following isn’t really an option in my opinion, but recently, there’s been something of a hum coming from pundits asking: should Italy sell it’s gold reserves?
The ‘Red Herring’ aspect of that is largely centered on the facts that European central banks officially own their state’s gold and are independent; and additionally use of reserves is governed by EU treaties.
Yes, we’ve learned of late that treaties are made to be ‘voluntarily’ broken.
But it seems likely some will be relinquished less easily and with graver consequences than others.

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