Berlusconi Loses Two Votes of Confidence
One in the Italian Parliament as it concludes that Berlusconi is an unf*able l*-a**, and one in the bond market as it concludes that Berlusconi's successor will be no better.
Guy Dinmore, Giulia Segreti, David Oakley, and Tom Burgis:
Berlusconi pledge fails to calm markets - FT.com: Italy’s borrowing costs on Wednesday rose into territory seen as unsustainable by analysts and traders despite a pledge from Silvio Berlusconi that he would resign ending months of political uncertainty about the Italian prime minister’s future. The yields on Italian government bonds surged after LCH.Clearnet, the UK-based clearing house raised the amount of margin, or collateral, that traders must post to insure trades of Italian government bonds against losses…. The yield on the 10-year bond rose to 6.47 per cent, a new euro-era high and nearly a full percentage point above Tuesday’s closing prices…. The large increases in Italian bond yields prompted a sell-off in European equity markets and sent the euro lower against the dollar.
There had been hopes earlier on that the decision by Mr Berlusconi to resign and not seek re-election would calm investors worried that Italy’s €1,900bn of public debt is unsustainable…
Italy's debt is sustainable if Italy must pay 4%/year in interest to borrow. If Italy must pay 7%/year in interest its debt is not sustainable: the Italian government must then com cup with an extra €60bn/year to appease the bondholders--that's an extra 4.3% of GDP in taxes.
And if nothing has done to convince bondholders that extra 4.3% of GDP tax increase dedicated to compensating them for default risk is coming, next year what will be needed will be not 4.3% of GDP but 8.6% of GDP.
