Italy'S National Debt Crashed Into The Eye

The European debt crisis intensified.

The referendum farce led by Greece came to a close, and the deepening of the debt problem in Italy came quietly.

On Wednesday, the yield of Italy's ten - year treasury bond broke through 7% of the "life and death line" which is of great significance to the market, setting the highest value since the establishment of the euro zone.

Although Italy successfully sold 5 billion euro one year treasury bonds at a critical time, the yield of the ten year treasury bond also dropped to below 7%. But as the third largest economy in the euro area, Italy has become an unbearable weight of global finance, and people's concerns about whether the country can continue to grow further has been exacerbated by the.

7% "life and death line"

Looking back on the performance of Italy's ten year treasury bonds this year, we can see that in the first half of 2011, Italy's treasury bond prices still basically conform to its own economic fundamentals, but when Germany put forward that "private sector" must take part in the Greek debt restructuring plan, Italy's debt interest margin has soared.

In the second half of this year, the cost of borrowing in Italy is getting higher and higher.

In August, when Italy issued a new batch of ten year treasury bonds, the yield was 5.22% at that time. When the ten year treasury bonds were reissued in October, the yield has risen to 6.06%, and this Wednesday has soared to 7.45%.

The recent surge in Italy's ten year treasury bond yields triggered concerns that the debt maturity of the ten year treasury bonds has risen to 7% since the outbreak of the European debt crisis.

Greece, Ireland and Portugal all sought external financial assistance shortly after the yield of ten - year treasury bonds reached that level.

Although it can not be said that only 7% of the yield of treasury bonds means that a country will be forced to seek help, but a bond dealer researcher told the first financial daily (micro-blog) financial intelligence reporter: "actually, 7% of the yield is called the psychological line of defense.

This figure is estimated based on a series of data. If the yield is above 7%, the debtor countries will not be able to afford huge financing costs. In such a case, if the outside world can not get help, the debtor countries will have a large-scale debt default.

On the contrary, if the country seeks outside help, the cost of borrowing will fall. "

Xue Hexiang, an overseas market researcher at Guotai Junan Research Institute, explained to reporters: "the soaring rate of return means that the cost of new government bonds will rise. For those countries that have been in financial crisis, they have limited cash in their hands. If the original yield is 5%, and now suddenly rise to 7.5%, that means their cost will rise by 50%, and the cash flow in their hands will be more intense."

Eric Green, an economist at TD securities company, also pointed out that after the interest rate reaches 7%, the high interest rate will eventually cause the country's economic growth to deteriorate, and after the economic contraction, more deficits will emerge.

In addition, the soaring Treasury yields mean that bonds do not have investment sustainability in the long run, so many bond buyers, including many banks, do not dare to enter the bond market, or even start selling.

Not long ago, the yield of Greece's ten - year treasury bonds surged to 20%. Now is Italy going to repeat the mistakes of Greece?

"The situation in Italy is not quite the same as in Greece," Xue Hexiang told reporters.

The reason why the yield of Greek ten - year bonds is out of control is that the risk of default is very large. But for the current situation in Italy, although it is much higher than normal level, it is still within the normal range.

Generally speaking, if the national debt price hits thirty percent off, then the probability of default is quite high, and the 7% yield implies that the price discount has not reached ten percent off, because the market generally believes that the risk of default is not so great.

However, while the ten year treasury bonds in Italy are rising, the rise in yields on Italy's short-term treasury bonds is even more shocking.

According to Tradeweb data, the yield of Italy's treasury bonds rose to 7.29% on the second day of Wednesday, and there was an upside down phenomenon of short-term treasury bonds and long-term Treasury yields. This is the first time since the advent of the eurozone.

The above bond analysts told reporters that this shows that compared to long-term treasury bonds, the market is worried that the risk of Italy's short-term debt default is increasing.

A vicious circle of widening spreads

This week, the most direct fuse for Italy's treasury bond yield to break through 7% is the European clearing house LCH.Clearnet Group Ltd announced on 9 that it would raise the initial margin requirement for Italy's maturity bonds.

According to the stipulation formulated by LCH.Clearnet Group Ltd, if the yield of a national treasury bond is five higher than that of a European sovereign bond rated at AAA level for a continuous period of 4.5% days, then the amount of the Treasury bond as collateral will need to be increased in repurchase pactions.

Accordingly, the agency has raised the margin requirement for bonds payable in 7~10 to 5 percentage points to 11.65%, raising the margin requirement for maturity bonds within 10~15 to 5 percentage points to 11.80%, raising 5 margin to 20% for margin requirements in 15~30.

Xue Hexiang told reporters that such a margin is the same as futures and foreign exchange trading deposits. If the demand for collateral is raised, then the attractiveness of Italy bonds to investors will be reduced.

At present, the typical difference between the interest rate of Italy's treasury bonds and the yield of a basket of AAA class European sovereign bonds is the spread of Italy's treasury bonds and German bonds.

The spreads between the two national bonds have been further expanded recently, especially when Italy's yield exceeded 7% this Wednesday. The interest rate difference of Yide's ten year treasury bonds has exceeded 500 basis points.

The above bond analysts told reporters that the spread of interest rates between Germany and Germany was on the one hand that the yield of Italy's treasury bonds soared. On the other hand, the yield of German bonds continued to decline under the impetus of risk aversion.

However, will the rise in interest rates lead to a further market sell-off and a vicious cycle of raising the margin again?

Xue Hexiang said: "the main concern of the market is the margin requirement for the 7~10 treasury bonds.

Although the possibility of further raising the margin is cleared, the Italy bond has been raised to 11.65%, compared with 4.6% in France and 8.6% in Spain. In fact, the margin of Italy's batches has been raised to a high level.

If the spread of Yide's interest rate is further expanded, the margin will not be increased frequently, because if it continues to rise, it may mean that large-scale panic will emerge, and even the entire Italy treasury bond market will probably be paralyzed.

Who is the Savior?

It can not be denied that, as the eighth largest economy in the world, the debt problem of Italy has not yet developed to a situation like Greece. However, it is far more dramatic than the three countries that have fallen down from the shock and negative effects of the global market.

According to the data, Italy is the largest debt country in the European Union, with a total debt of 1 trillion and 900 billion euros ($2 trillion and 600 billion), accounting for almost 1/4 of the total public debt in the euro area.

Spain, Portugal and Ireland have less debt than Italy.

In the first quarter of 2012, Italy will face a debt repayment scale of 64 billion euros, and the debt repayment scale in 2012 will reach 300 billion euros. Italy must borrow enough money next year to repay the debt that is about to expire and to fill the target budget deficit of up to 25 billion euros.

The market is worried that if Italy can not find such a large sum of money to repay its debts in the short term, Italy will be forced to seek financial assistance, which will have an unprecedented impact on the global market.

However, most economists predict that although Italy's debt is large, Italy will not apply for assistance.

In the short term, the soaring cost of borrowing is a problem for Italy. In fact, the country still has a basic budget surplus, which means Italy has the money to pay the cost of debt.

In a recent report, Goldman Sachs pointed out: "although we agree that the Italy central bank can support the current financing costs, they are constantly developing towards a pessimistic direction, which may ultimately limit the ability of the government to roll debts and make sustainability a problem.

And when yields are soaring and confidence is at a low ebb, financial market turbulence will enter the real economy, and Italy may enter a deep recession.

If investors do not want to lend so much money to Italy, Europe will have to use IMF to help Italy with all the funds it can raise. Otherwise, if Italy defaults, other European countries will not be able to save even if they want to save it, which will eventually trigger systemic risk and the euro area will probably fall into a serious recession again.

Xue Hexiang also believes that the EU will not be able to make Italy's debt problem a difficult situation for Greece in any case, but the EU is not an omnipotent Savior. There are two completely different problems in helping Italy and Greece.