Hey I Found Something to Panic Over: Italian-Bund Spreads

I chanced upon this tweet from my good friends at Zerohedge and it immediately resonated with me and I’ll tell you why.

"the nightmare scenario we've all been hypothetically thinking about for years, if not decades, is here. Runaway German inflation at the same time as soaring Italian yields." – DB

— zerohedge (@zerohedge) June 6, 2022

Back in 2012 during the PIGS debt crisis, Germany begrudgingly bailed out Italy, Greece, Spain, Ireland, and Portugal. Basically all of those economies are terrible and the theory was at the time, the ECB would collapse. Luckily for the PIGS, Germany caved thanks to American influence and it never happened.

But if such a terrible thing happened now, and it’d be a damn shame if it did, there would be nothing Germany could do to stop it, since they’re racked with inflation. This could be a worst case scenario playing out for Europe.

So what’s the backdrop? Italy never bothered to extend the maturities on their sovereign debt.

Their debt to GDP, like all nations, is even higher than before.

And the market is beginning to smell danger, with Italian bond yields disconnecting from German Bunds. The spreads have doubled in recent months.

FX markets sense it too.

Stay tuned!