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In the new post crash modern world, we have learned that banks can be “To Big To Fail”.  In 2011, we are going to discover the meaning of “To Big To Rescue”.

Italy went to market today, and shock of SHOCK, people didn’t want to buy its Sovereign paper.  The rate it paid on both long-term and short-term, shot up in costs compared to the last issue.  The market is starting to show the same signs of cutting Italy off from the debt trough, as it did when it attacked Greece and Ireland.  The rate Italy pays over the German Bund, is increasing.  This means one thing, and only one thing.

The bond market vigilante’s are busy in Europe selling Italian debt.  If I was a bond manager, tasked with holding Sovereign Euro Debt, the last paper in the world I would want to hold now is Italy.  You know its going to get hit, so you want to get out-of-the-way, even if you want to be a buyer of that paper later.  However, for now Italy is already toxic to International bond buyers.

Here is why,

  • 3rd largest pile of total debt in the world, 7th largest Economy
  • only one of three unable to issue its own fiat paper
  • aging demographics leaves fewer people to pay back the debt
  • 120% of GDP in Sovereign Debt

Italy has amassed the third largest pile of debt in the world, while only having the 7th largest economy.  This type of mismatch in historical spending verses real world growth is a long-term killer. The second chart in this article shows Ireland, Italy & EU Averages for GDP & Debt as of 2008.  Since this chart was produced, the numbers have only grown.  I showed this one, so that the size of Greece & Ireland can be compared to Italy, on equal terms.

To compound issues, Italy which has historically been able to devalue the old Lira when ever it was necessary to stimulate growth, no longer can do so at will.  As a member of the Euro, Italy gave up its Sovereign capacity to issue money as needed.  This is going to hurt them, as the loss of self destiny destroys potential future growth chances.

The demographics for Italy are horrendous, when taken in aggregate a view of the future becomes easy to see. The birth ~ death ratio is negative, as more people die per 100,000 than are born per 100,000 on average per year.  This leaves a shrinking pool of new potential tax payers to finance an already growing pile of debt.  This will be compounded as the average life expectancy of current retirees continues to climb while the number of people retiring also grows.

The ability to retire early, while living a long comfortable retirement is not going to happen in Italy in the coming decades without radical changes in their debt structure.  While Italy has one, and I mean ONE thing going for it, in the case of internally held debt, it will not be enough to change the rest of the dynamics involved.

AEP has an interesting article today on Italy, in it he says…

Neil Mellor, currency strategist at the Bank of New York Mellon, said big institutional investors have pulled funds out of Italy and rotating into German debt on a large-scale. “Our flow data shows that the trend has been just as concerted out of Italian debt as it has been out of Irish or Greek debt. Italy should be able to weather 2011 in good shape but the government’s debt dynamics are very poor,” he said.

Italy is too big to be rescued by a diminishing group of creditor states in the EMU core, should it ever need help. Public debt will creep up to 120pc of GDP next year – or over €1.9 trillion – a level widely seen as the outer limit of debt sustainability.

Italy has always been the poster child for history.  There is no reason to think that the future is going to be different.  As the weakest nation with the title “To Big To Rescue”, the market appears to be working on finding out what happens than.

Italy has the hallmark of being the Euro Black Swan, if its Sovereign access to market is cut off.  Since  its debt can’t be rolled over, we will have the obvious test case candidate for who has to leave the Euro, even if the Euro can’t leave it.