Wednesday, November 09, 2011

6.66%, the number of the Italian 10-year bond yield

Story thus far:

- Italy amassed public debt 120% of GDP
- Berlusconi focused on organizing bunga bunga parties
- Feeble attempts to balance the budget were met with mass demonstrations and political opposition

Market mechanics:
- MF global went bankrupt because their Italian bonds lost too much in mark-to-market value (value, which someone is ready to pay if they sold the Italian bonds now on market). MF used criminal ways and took reckless risks, so without Italian bonds they would have eventually found another tree to hang themselves.
- Jefferies, a financial firm, was suspected to be fatally exposed to Italian bonds. They disclosed information about their Italian bond ownership and also sold them. They turned out fine.
- Fire sales of Italian bonds to avoid scrutiny. Nominal Italian bond yield explodes. At least temporarily, yields are past the point of no return, after which savings and cuts no longer solve the problem, as interest accumulates too fast.

Rejected solutions:
- Italy balances budget - if they could, they would have already done that
- EFSF: European countries just don't have enough money to bail out Italy while staying solvent

Next steps:
- ECB prints money and causes high inflation
- Eurozone turns into nineties depression historical re-enactment society
- Italy converts debt to liras and devaluates

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