Italy May Be Casualty of Europe Debt Crisis as Yields Rise, Evolution Says

http://www.bloomberg.com/news/2011-07-07/italy-interest-costs-set-to-jump-14-billion-a-year-unless-yields-decline.html

Italy risks becoming a debt crisis casualty if bond yields remain at their current levels because annual interest costs will jump by more than $14 billion, according to Gary Jenkins at Evolution Securities Ltd.

Yields on Italy’s 10-year bonds yesterday exceeded 5 percent for the first time since 2008, threatening to add an extra 9.7 billion euros ($14.3 billion) to coupon payments, Jenkins, London-based head of fixed income at the brokerage, wrote in a note. The nation has more than 860 billion euros of notes maturing in the next five years, he wrote.

SS

THE PIIGS ARE IN TROUBLE

EXPECT THE SEQUENCE AS FOLLOWS

GREECE

IRELAND

PORTUGAL

SPAIN

THEN ITALY

THIS SHOULD BE PHASE 1

IN PHASE 2

FRANCE 

GERMANY AND THEN UK

THEY WILL ALSO FACE THE HEAT

Italy has so far avoided being sucked into the crises that have engulfed Greece, Ireland and Portugal, and which threaten Spain. Lawmakers are seeking to balance the budget by 2014 and plan to push deficit-cutting measures worth 40 billion euros though Parliament later this year.

“If contagion spreads to the point where Spain is unable to fund itself in the market and there is concern over private participation in any bailouts, it is difficult to see how highly indebted Italy could escape unhurt,” Jenkins wrote. “Debt reduction will become considerably harder if contagion spreads and funding costs increase further.”

Italian 10-year bonds fell today, driving the additional yield investors demand to hold the securities instead of benchmark German bunds to the most since before the euro was introduced in 1999. The Italian yield increased six basis points to 5.18 percent, pushing the difference in yield, or spread, to bunds to 224 basis points.

Debt Pile

The nation, which has more than 1.6 trillion euros of bonds outstanding, the world’s third-largest pile of debt after the U.S. and Japan, already spends more than 4.25 percent of economic output servicing its debt, according to Jenkins. Each percentage point increase in rates would cost it about 9 billion euros, or 0.6 percent of gross domestic product, if applied over the whole 2011-2016 period, according to the note.

The average coupon on the nation’s fixed-rate bonds is about 4.125 percent, compared with an average 3.6 percent for those maturing through 2015, according to Jenkins.

The nation also has 260 billion euros of one-year notes, according to Evolution. While the average yield on one-year notes is 1.8 percent over the past year, that has now increased to about 2.25 percent, adding 1.2 billion euros to servicing costs, Jenkins wrote.