1. CDS and Implied Probability of Default
At 500bps, CDS on Italian public debt implies an annual probability of default of 6.8%. Compounded over 5 years, that would be a 30% chance of default in the next 5 years.
We all know what the track record of the market is in predicting large defaults (Lehman, Iceland, Dubai, MF Global, Greece).
2. Wealth tax
If the Italian government decided to suddenly appropriate from its citizens bank accounts (something that was done in 1992, and is now officially denied) for example an average €1000 per person, infants included, that would bring €60 billion.
That would be enough to cover 8-10 weeks of public debt refinancing, or to reduce debt/GDP ratio from 120% to 116%. You tell me if that’s enough to calm the markets.
Germany did, in 1948.
“They’ll probably go to the IMF, have a credible standby program and then aid from Brussels and bilateral aid from selected sovereign governments in Europe and the U.S. will be available,” Buiter said in a Bloomberg Television interview. “We could see the first all EU-15 sovereign default since Germany had it in 1948.”
Source: Almunia Says EU Ready to Assist Greece in Budget Plan (Bloomberg)
It had to happen sooner or later. It happened in the UK.
Via The Telegraph:
The UK Debt Management Office (DMO) attracted just £1.67bn in bids for its sale of £1.75bn of 2049 gilts this morning, its first uncovered auction of conventional gilts since 1995.
The cover of just 0.93 times is believed to be the lowest in history and far worse than the 0.99 times in 1995. The average cover of the last three auctions was 2.1 times.
Some macro figures from The Economist on the Euro area’s troubles:
- Public debt to be raised by Euro-area countries, Britain and Switzerland in 2009: €2 trillion or 17% of their GDP
- Public debt to be raised by Italy alone: €377 billion or 23% of GDP. Yet, Italy can borrow for 10 years at 4.6% a year
- Public debt to be raised by Ireland alone: €47 billion or 24% of GDP
- 10-year government bond spread between PIGS and German bunds increased from well below 50 basis points at the beginning of 2008 to over 250 bp for Greece and over 100 bp for Italy, Portgual, Spain. Ireland spread is over 200 bp.
Scariest sub-title yet: “What a default might look like”
