In October ’08 European banks looked pretty healthy; they held few toxic US mortgage backed securities. But, this strength was a fiction. European banks met their Waterloo in large holdings of euro-denominated sovereign debt of the PIIGS (Portugal, Ireland, Italy, Greece and Spain). The banks assumed that Germany, France, and other strong European economies would never allow a sovereign default of a Euro denominated bond. Oh well! And, here, once again, the rating agencies were MIA.
Tag Archives: Euro Collapse
Italy is Next!
Greek PM Papandreou’s call for a referendum to approve additional financing has heightened fears that Greece will default. In response 10-yr Italian debt yields hit 6.33% a euro-era high and as much as 4.55% above super safe German bonds. Once the spread exceeds 4.5%, clearing houses can force investors who use Italian debt as collateral to make margin payments. In the recent past, all such requests have resulted in bail-outs. Italy, look out, Berlusconi, bye bye!