Italy forced to pay record interest rates at auction

[xchrom]

http://www.bbc.co.uk/news/business-15888752

Italy has been forced to pay record interest rates in a 10bn euro ($13bn; £9bn) auction of treasury bills.

The rate of interest for the new debts due to be repaid in six months was 6.504%, compared with 3.535% in the last comparable sale on 26 October.

The rate for two-year borrowing was 7.814%, up from 4.628% last time.

The Bank of Italy stressed that demand for the bonds had been high, with demand for the debts outstripping supply by 50%.

[marmar]

1. Another disastrous bond auction, ala Germany.

nt

[ThomWV]

4. Oh, I dunno. Somehow a 6% Bond rate doesn't sound exactly like a disaster.

We hit 18% during Paul Voelker's reign (Jimmy Carter's Presidency), that my dear friend was a disaster.

[marmar]

5. In the context of everything else happening in Europe, it was a disaster.

nt

[Yo_Mama]

6. When your debt-to-GDP ratio is 120%, it's a disaster

If continued, that is, but it is very hard to see how Italy's position can improve next year, given everything.

[ThomWV]

7. Please explain the relationship.

You lost me in there somewhere buddy. Please explain the relationships. So you owe more than your'e worth, how does that make it a disaster for your borrowing rate to go up? How is it bad for you to have your ability to go further into debt diminished?

I really fail to get your point here. First off 6% ain't shit, we were paying out 18% under Carter. Second, the increased rate should have the effect of reducing the rate of debt to production which is certainly whats needed by a country that is far into debt. So tell me, just what point are you trying to make and how does your argument support it?

[Yo_Mama]

8. Because significantly higher rates produce much higher debt servicing costs

As a fraction of GDP. You have to sharply raise your taxes and cut your expenditures, i.e., a sudden relative austerity. Austerity chokes off economic growth, thus expanding the debt to GDP ratio.

Depending on how loose government spending was before, you may or may not be able to survive it. Italy has been struggling along for quite some time trying to control its debt load, and the result has been to induce slow growth.

Italy will be forced to default on its debt in some way if its rates don't go down sharply within a year. Its long yields are actually lower than some of its short yields as of this morning - that means recession.

The math is very simple. At debt 100% of GDP, an average interest rate of 3.5% means that a country has to run a primary surplus of 3.5% of GDP - GDP growth rate to not increase debt/GDP ratio. At 100% of GDP, an average interest rate of 6.5% means that a country has to run a primary surplus of 6.5% - GDP growth rate to not increase debt. The first is doable, the second is not.

At debt 120% of GDP, an average interest of 4.5% plus no real growth in the next year would force Italy to run a primary surplus of about 5% next year not to increase its debt to GDP ratio. This seems unfeasible.

Until the late Great Recession, Italy had been mostly running primary surpluses. Then it was unable to do that, understandably. But now it is going to try to run a bigger primary surplus when it is already slipping into recession?
http://sdw.ecb.int/quickview.do?SERIES_KEY=121.GST.Q.IT.N.D1300.PDF.D0000.CU.E

If Italy had been a profligate spender in recent years, it is possible that it could institute the changes necessary without too deeply restraining growth. But Italy HASN'T been a profligate spender - it has been quite responsible compared to most developed countries. Therefore it doesn't have much to cut that won't have negative economic feedback.

If the US had to trim its budget by 3% of GDP next year, it would have to cut spending or raise taxes by 405 billion. In one year. And it would have to maintain that cut each year going forward. To put that into perspective, total government social spending was last reported at 2,297 billion. If you cut all those benefits evenly by 17.6%, you'd get it done. But the economy would collapse as a huge number of people took a very large income cut, unemployment would rise, and that would cut tax income and raise relative social benefit spending, and so you'd probably also have to raise tax rates by about 10% on the top third to compensate.

For Italy, it appears impossible, and it is not as if they haven't already raised taxes and cut spending, which has produced the following result:
http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8785

Adding US Debt as a percent of GDP chart:

The spike in interest rates back then threw the US economy into a very deep recession. But it did not make our debt servicing costs unsustainable, because our debt to GDP ratio was low and interest rates were doomed to collapse with the recession:

[ThomWV]

9. Only if you finance existing debt with new debt, and as far as I know Italy doesn't.

I believe that the only country in the world that refinances its debt is the US, I don't think Italy has ever done it. That means that the cost of exiting debt does not change and the new rate is only applicable to new debt - hence the effect of discouraging the incurrance of new debt.

Your scenario might be applicable were it US debt, but not Italian or any other country that doesn't not have the refinance ability.

[Spider Jerusalem]

10. You'd be wrong then, Italy has to refinance nearly a third of its total debt before 2013.

€500 billion, to be exact.

Nevertheless with some €1.6 trillion of debt, Italy is dependent on investors confidence to keep its interest payments low. In 2011, it expects to pay €73 billion of interest, assuming a 4% rate. But at 6%, interest payments would absorb another €35 billion a year. The current yield on 10-year debt is 5.4% and rising. This is a vicious circle. The higher the refinancing rate, the greater the worries about unaffordability, which means an even higher rate. And Italy has to refinance €500 billion of debt by the end of 2013.

http://www.economist.com/blogs/buttonwood/2011/07/sovereign-debt-crisis

[Yo_Mama]

12. Huh? You really don't understand this!

Italy's average maturity was 7.09 years as of this summer:
http://uk.reuters.com/article/2011/07/13/uk-italy-moodys-idUKTRE76C0Z920110713
When you sell a sovereign bond, it is not for an infinite term. EVERY country floats new bonds to replace the bonds being paid out.

The only way to avoid financing payments for existing debt at maturity is to pay down your debt at 1/the average maturity rate annually, although in fact maturities will be lumpy so some years you might have to pay down a lot more than other years. Therefore, in order not to be refinancing debt, Italy would have to be paying off over 14% of its total debt each year, or somewhere around 16% of GDP. That is a huge number - to get that money Italy would have to add ADDITIONAL tax revenue each year of over 15% of GDP.

Here is a short article that explains Italy's situation:
http://www.enterstageright.com/archive/articles/1111/1111italy.htm

As of today Italy's short term yields were higher than its long term yields, although they were all unsustainable and all at yields higher than 7%.
10 year:
http://www.bloomberg.com/apps/quote?ticker=GBTPGR10:IND
5 year:
http://www.bloomberg.com/apps/quote?ticker=GBTPGR5:IND
2 year:
http://www.bloomberg.com/apps/quote?ticker=GBTPGR2:IND

Classically, if your long bond yields go too high and you believe you can correct the situation you shift to shorter term maturities, but Italy doesn't have that escape hatch. In 2012, Italy needs to sell around 340 billion in debt. Most of that is to cover maturing securities under their plan. Barclays estimated new money required for 2012 to be about 35 billion, so the real action is in the maturing debt. That is a bit under 18% of total debt.

[Prometheus Bound]

11. Let me try.

Let's put their debt at a round 2 trillion. If they pay 2% as Germany does, that's 40 billion in interest a year. Today the rate for Italian bonds went up to 8%. That's 160 billion a year in interest alone if this keeps up. How do you pay for that and pay down debt in a recession (or depression)?

Two-year Italian bond yields rocketed half a percentage point to a euro-era high above 8 percent, albeit in low volume. The yield on the shorter-dated Italian debt was as much s three-quarters of a point higher than that of 10-year BTPs, reflecting investor fears that they may not get their money back.
http://www.reuters.com/article/2011/11/25/markets-bonds-euro-idUSL5E7MP29520111125

One more thing. As I remember during the Carter years, the US was the world's largest creditor nation. Now it is the world's largest debtor nation.

[dixiegrrrrl]

2. Wait till next auction.

Lots of folks who glaze over this headline will not get the portent of this news.
Rising bond interest rates are inevitable at this stage of system collapse.

[ProgressiveProfessor]

3. I am also concerned about pension investors desperate for returns buying in to this

[cherokeeprogressive]

13. That round thing you see is the Euro, circling the drain. n/t