The capital markets have shown no signs of easing up on Europe’s debt laden countries.  Until recently, Italy’s headline was little more than an occasional reference as one of the “I’s” in PIIGS.  This has changed in the last few weeks as the severity of the situation in Europe is reaching a point we have been expecting for some time now.

To put things into perspective, here are some numbers. Greece has the highest level of debt as a percentage of GDP – 142%.  Italy has the second highest level of debt as a percentage of GDP – 119%.  Portugal and Ireland are basically tied for third with approximately 95%.  Until two weeks ago, the media paid little attention to Italy.  Hearing this, you could say to yourself, “So who cares if the media focuses on one country more than another, it’s still ugly in Europe.”  Such a statement fails to take into account the economic size of the countries involved.  Greece is the 12th largest economy in the European Union.  Portugal and Ireland are 14th and 15th, respectively. Italy is 4th.  It is also part of the G7 and, aside from their swimsuit styles; it is a developed country that plays an important role in the overall global economy.

It does appear, however, that the market failed to recognize the severity of the situation in Italy until the end of June.  Since then, the market has been playing catch-up.  For example, the interest rate on Italian 10 year government bonds over the past two weeks has gone from 4.87% to 5.62%.  Although this may not seem like much of an increase, it has an enormous effect on current bond holders and Italy’s ability to issue more debt.  Current bond holders have lost more than 5.5% on their investment in just over two weeks!!!!  On a bond!!!!  Did we mention Italy is the 4th largest economy in the European Union?

Italy issued another €5 billion of debt yesterday.  This debt ranged in maturity from five years to fifteen years.  Although Prime Minister Berlusconi won a confidence vote for austerity measures, we are not so sure how successful those measures will be.  Remember the results of Greece’s recent austerity packages and their ability to “tighten their belt.”  We fear that without growing the economy, tightening the belt with austerity measures is not a formula for success.

Sincerely,

Your THOR Team