Italy Is 2 Percentage Points From Disaster, Evolution Says

July 11 (Bloomberg) -- Italian bond yields are less than 2
percentage points away from disaster as its 10-year notes
tumble, according to Gary Jenkins, head of fixed-income at
Evolution Securities Ltd.
    Yields on Italy’s benchmark 10-year bonds closed above 5
percent for the first time since November 2008 on July 6 and
were at 5.55 percent, a nine-year high, at 1:45 p.m. in London
today. Greece, Ireland and Portugal all had to ask for
international assistance after their 10-year yields rose past 7
percent.
     Italy is being dragged into the crisis because it has more
than 1.6 trillion euros ($2.6 trillion) of bonds outstanding,
the world’s third-largest pile of debt after the U.S. and Japan.
Lawmakers are seeking to balance the budget by 2014 and plan to
push 40 billion euros of deficit-cutting measures though
Parliament later this year.
    “It is worth remembering how quickly bond yields can get
out of control by looking at what happened to Greek, Irish and
Portuguese 10-year yields,” said Jenkins, who predicted
Greece’s bailout last year and who was formerly head of
fundamental credit strategy at Deutsche Bank AG and global
credit-research chief at Barclays Capital. “What would keep me
awake at night if I was a European finance minister is that we
are only about 2 percent away from a potential disaster
scenario.”
                        Accelerated Rise
    Greek, Irish and Portuguese 10-year bonds spent an average
43 days trading at more than 5.5 percent before rising above 6
percent “on a consistent basis,” said London-based Jenkins.
They then spent an average of 24 days above 6 percent before
breaching 6.5 percent, and 15 days above 6.5 percent before
passing the 7 percent level and asking for a bailout, he said.
    Italian 10-year yields still have “some way to go” before
they reach 7 percent, Jenkins said.
    European finance ministers are meeting today and tomorrow
amid concern Italy will be engulfed by the crisis and divisions
between member states on how to structure aid for Greece.
    The cost of insuring Italian government debt using credit-
default swaps jumped to a record, helping also send the Markit
iTraxx SovX Western Europe Index to an all-time high.
    Contracts on Italy surged 32 basis points to 283, according
to CMA prices. The Markit iTraxx SovX WE climbed 33 basis points
to a record 289. An increase signals deteriorating perceptions
of credit quality.
                       ‘Too Big to Save’
    “The markets are focusing on Italy and Spain and combined
they are too big to save,” said David Owen, an economist at
Jefferies International Ltd. in London. “Note that they are all
linked together by their banking systems -- the French banks are
all over Spain and Italy.”
    While Italy’s debt is equivalent to about 119 percent of
its $2.1 trillion gross domestic product, its budget deficit is
4.6 percent of output, compared with 7 percent in France and 9.2
percent in Spain, according to Eurostat, the European statistics
office in Luxembourg. The annual growth rate was 1 percent in
the first quarter, the lowest of all the major European
economies bar Spain.
    The spread between yields on Italian and German 10-year
debt rose 39 basis points today to 283, a euro-era high.
    “Taking that into consideration, if I was at the meeting
today, then common European bond issuance would be on the
agenda,” Jenkins said. The market moves will “give some
urgency to the meetings,” he said.