Italian government bonds are, without a doubt, in super-bubble territory. It won’t be long before a pin pricks it and – pop. A critical vote in Italy on December 4 could be that pin. That’s why you need to act now. You may be exposed to this toxic financial waste without even knowing it.
The comments above and below are excerpts from an article by Nick Giambruno (InternationalMan.com) which may have been edited ([ ]) and abridged (…) to provide a faster & easier read.
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Italy has one of the most indebted governments in the world. It has borrowed over $2.4 trillion, and its debt-to-GDP ratio is north of 130% – for comparison, the US debt-to-GDP ratio is 104% – but the situation is actually much worse. GDP measures a country’s economic output…[but that is] highly misleading.
Mainstream economists count government spending as a positive when calculating GDP. A more honest approach would count government spending as a big negative and, in Italy, government spending accounts for a whopping 50%-plus of GDP. A more accurate debt-to-GDP ratio would exclude government spending from economic output. I suspect that figure would reveal the Italian government’s hopeless insolvency.
I don’t see how it’s possible for the Italian government to extract enough in taxes from the productive part of the economy to ever pay back what it’s borrowed yet Italian government bonds are trading near record-low yields. It’s a bizarre and perverse situation. Over a $1 trillion worth of Italian bonds actually have negative yields. That’s completely insane.
Given the huge risks associated with lending money to the bankrupt Italian government, the yields on Italian sovereign bonds should be near record highs, not record lows.
Source: Zero Hedge
…Doug Casey thinks the situation in Italy is just the beginning of a disaster much worse than the 2007–2009 global financial crisis. Below is what he has to say:
I expect a truly major banking crisis. Much worse than that of 2007–2009.
Governments, who are all bankrupt, borrow money from commercial banks. Commercial banks have lent it to them because they believe it’s a risk-free loan. Governments encourage them to lend recklessly, hoping that will jump-start sluggish economies.
Central banks, which are the arms of their governments, have taken interest rates to zero and below for that reason and to make it easier for governments to service their debts. This policy has encouraged businesses to take on debt. It’s an idiotic and reckless experiment that will end—likely in this cycle—with bankrupt central banks and governments bailing out bankrupt commercial banks and businesses. Just the way they did in 2007–2009. Except this time, the situation is much more serious.
How to profit? Don’t own European companies, stocks or bonds, and banks in particular. In fact, even though they’re already down considerably, they’re going lower and are excellent candidates for short sales, or the sale of naked calls.
I agree with Doug. The European banks most exposed to the looming crisis in Italy are excellent short-sale candidates. To hone in on the best options, I looked at which European banks hold a lot of Italian government bonds and, according to the German media, French banks are the most exposed by a wide margin. They have over $275 billion worth of Italian sovereign debt on their balance sheets. Germany is next, with $90 billion, followed by Spain, with $45 billion.
If you own any of the European bank stocks listed below, I recommend selling them immediately. Even though their share prices have all taken serious hits recently, they’re still great short-sale candidates.
- France—Société Générale (SCGLY)
- France—BNP Paribas (BNPQY)
- Germany—Deutsche Bank (DB)
- Spain—Banco Bilbao Vizcaya Argentaria (BBVA)
- Spain—Banco Santander (SAN)
You only have a short window to short some of these banks’ stocks because, on December 4, Italy is voting on a crucial referendum. It’s almost certain to fail – and that will probably be the pin that pricks this super bubble.
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