Italy Bankrupt! 10 Yr Yield Rises Above 7.4%, Country Theoretically Unable to Fund Itself at These Levels, PM Resigns

After Italian Prime Minister Berlusconi offered to resign yesterday, the credit markets almost sighed in relief. But today, markets were punched in the jugular as LCH.Clearnet increased margin requirements on Italian bonds. Margins were raised because 10 year credit spread exceeded 450 bps, the same point at which Clearnet raised margins on the bonds of other peripheral countries in Europe.

The pressure is certainly on the ECB and Italy now to find a solution to this debt crisis, as Italy is too large to be bailout out. Yesterday, known for his sex scandals and political corruption, Prime Minister Berlusconi was pressured to leave his post because Italian yields were creeping above 6.5%. According to the Times, "In the end, it was not the sex scandals, the corruption trials against him or even a loss of popular consensus that appeared to end Mr. Berlusconi’s 17 years as a dominant figure in Italian political life. It was, instead, the pressure of the markets — which drove Italy’s borrowing costs to record highs — and the European Union, which could not risk his dragging down the euro and with it the world economy. On Wednesday, yields on 10-year Italian government bonds — the price demanded by investors to loan Italy money — edged above 7 percent, the highest level since the adoption of the euro 10 years ago and close to levels that have required other euro zone countries to seek bailouts."

Currently, the Italian 10 year yield has exceeded 7.4%, and the 2 year note has risen more than 10 year rate. At this point, Italy is theoretically unable to fund itself and could theoretically be bankrupt. The margin call on bonds due between seven and 10 years was raised by five percentage points to 11.65%, for bonds due between 10 years and 15 years it was raised by five percentage points to 11.80%, while for bonds that mature in 15 years and 30 years the margin call was raised by five percentage points to 20%. The changes come into effect Nov. 9 and will have an impact on margin calls from Nov. 10, the French arm of LCH.Clearnet said.

Link: http://leverageacademy.com/blog/2011/11/09/italia…