If Yields Keep Surging, Italy Will Require a Bailout

Ireland, Portugal, Greece, Spain, Cyprus have all need some sort of bailout from the European Central Bank and Germany. The next country requiring a bailout will be Italy.

According to Bloomberg Briefs, Italy will surpass the IMF’s definition of solvency once the average cost of its debt surpasses 680 basis points. Currently the Italian 7-year sovereign yield has increased from 538 basis points to 589 basis points.

If Italian yields keep moving like they’ve been, the country will require a bailout.

The reason being is simple: spiking funding costs will make the liabilities of Italy start to look like Greece. Italy already has debt as large as Spain and it could become worse with the path its economy is currently on.

The latest IMF predictions for the Italian economy call for a contraction at a rate of 1.9 percent for 2012. I find this incredibly optimistic considering Output declined 0.8 percent QoQ during the first quarter of the year.

Moreover, PMI data in Italy has been getting worse: January 46.8, February 47.8,

March 47.9, April 43.8, May 44.8. I would venture to guess that June’s reading would come in below 43.  These readings suggest that Q2 Output will be far worse than Q1.

Finally, the research of Carmen Reinhart and Kenneth Rogoff shows that when sovereign debt surpasses 90% economic growth becomes hindered. Currently Italy’s Debt/GDP ratio is at 126 percent.

If yields continue to rise at the current pace, Italy has less than one month.

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