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Here's Why Italy's CDS Are The Biggest Risk For The Eurozone

Tyler Durden's picture


Much hollow rhetoric has been uttered about the vast existential threat presented by Greek CDS. As we have reported, Greek CDS is the least of Europe's problems. When it comes to the stability of the European dominoes, it is and has always been about Italy, which is not only the second worst country in Europe after Greece on a debt/GDP basis, and also the country with the largest amount of nominal debt, but more importantly has the largest amount of net CDS outstanding. All this is summarized on the Bloomberg chart below.

What the market is most confused by is that Spain, which everyone thought would be the next to fall after Portugal, yet which in the Cajas has the same GSE-type structure that provides a natural buffer to a housing system that is getting destroyed by its own Option ARM implosion (unlike the US' Liebor, Euribor is at 1.593% and making adjustable mortgages quite painful), the bond vigilantes decided to go straight to the gateway to Europe's core. Italy. So ignore whatever the PBoC is doing with the EURUSD, and Brian Sack is telegraphing with his ES ramp into the close: the truth is Italy is on the verge, and with all communicating vessels, the pain is only just beginning as Europe will find out very soon: as the chart below shows, there is a doozy of Treasury issuance about to be unleashed by the Italian Treasury.

Bottom line: the Italian CDS is not so much an aggregator of risk, as a beacon of where investors think risk will emanate from next. Although, to be fully objective, the biggest surge in recent months in net notional has not been at Italy, nor Spain, nor any of the other PIIGS, but.. France.

There is, however, one country that is missing from the Y/Y surge comparison. The United States of America.


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Fri, 07/08/2011 - 16:36 | 1438210 mayhem_korner
mayhem_korner's picture

So with France in the mix, do we get F-PIIGS...

...and with the US, do we get FU-PIIGS?

Fri, 07/08/2011 - 16:49 | 1438267 camaro68ss
camaro68ss's picture

bail them bitchez out! we need to rally on!

Fri, 07/08/2011 - 17:02 | 1438322 Highrev
Highrev's picture

Nice to see some focus (someone send the rating agencies a note on the subject).

It really helps.

As does objectivity.

Speaking of which, have we seen any ZH mention of the extremely light volume on today's melt "down"?


Fri, 07/08/2011 - 18:19 | 1438510 Don Quixotic
Don Quixotic's picture

No. I asked about this earlier as well. The slow pace of trading was downright suspicious today. While it may just be coincidental or a problem with my rig I'll also point this out: the most basic (and free) tools are not reporting today's volume right now. This may change momentarily, but shows no volume bar for $spx. Google Finance shows yesterday's volume for .inx. Yahoo Finance will show that volume was bottomed out for the whole day except a spike right at the open but will not show the aggregate volume for the day. Like I said, this may just be a temporary something-or-other and I don't want to get my tinfoil hat out just yet; but, it's annoying the hell out of me since I watched the volume all day and it didn't even come close to being even nearly almost 1 billion shares traded for the S&P. Furthermore, JPM and C (I'm sure there may be others that I didn't catch as well) had volume that was laughably below their averages. 

Someone, please say something about this. Tyler, please tell me what happened today. I don't have the tools to investigate, but I do have the eyes to observe it. It just didn't feel right. Mr. Tyler Durden, I wait for word about this mystery. Please illuminate. I am inthe dark.

Fri, 07/08/2011 - 18:33 | 1438542 Don Quixotic
Don Quixotic's picture

OK, let me retract that partially. Stockcharts now has volume up there, but it is significantly higher than what they were showing throughout the market day. Apparently, Google Finance and Stockcharts had the same glitchy info. Volume was not actually that bad for the S&P. 


Fri, 07/08/2011 - 19:11 | 1438631 Youri Carma
Youri Carma's picture

In Hedge Fund terms Fuck the PIIG's.

Fri, 07/08/2011 - 22:07 | 1438969 old naughty
old naughty's picture

you left out it is FUUK-PIIGS

Sat, 07/09/2011 - 16:01 | 1440115 snowball777
snowball777's picture

You left out it is FUUK-US-PIIGS.

Sat, 07/09/2011 - 06:54 | 1439327 Nout Wellink
Nout Wellink's picture

If you add China and Kameroon as well, you know what is going to happen to Europe :-)

Fri, 07/08/2011 - 16:37 | 1438216 carbonmutant
carbonmutant's picture

Berlusconi attack on Tremonti is the tip of the iceberg...


Fri, 07/08/2011 - 18:07 | 1438489 Arius
Arius's picture

w/ tremonti's heart condition thats a dangerous game he is playing ... a smart tax guy would call it quit ...

Fri, 07/08/2011 - 16:39 | 1438224 mayhem_korner
mayhem_korner's picture

At some point, isn't some nation going to just call the whole slow-motion-train-wreck off and go postal via invasion or carpet bombing?

Sat, 07/09/2011 - 14:09 | 1439866 Non Passaran
Non Passaran's picture

If they are led by geniuses such as yourself that, sir, is indeed a possibility.

Fri, 07/08/2011 - 16:39 | 1438227 treemagnet
treemagnet's picture

Does each country get their respective "15 minutes" or do the dominoes just start falling?

Fri, 07/08/2011 - 16:45 | 1438249 carbonmutant
carbonmutant's picture

They gridlock internally over how to allocate dwindling resources...

and then like a top that's lost its spin they fall over.

Fri, 07/08/2011 - 16:40 | 1438230 Misean
Misean's picture

"the bond vigilantes decided to go straight to the gateway to Europe's core."

The allies tried that. It didn't work out so well...

"the biggest surge in recent months in net notional has not been at Italy, nor Spain, nor any of the other PIIGS, but.. France."

Yeah, that route worked out a bit better...just sayin...

Fri, 07/08/2011 - 21:26 | 1438885 AccreditedEYE
AccreditedEYE's picture


Fri, 07/08/2011 - 16:49 | 1438266 AldousHuxley
AldousHuxley's picture

Euro-peons, don't hate on slant eyed Chinese for now they own you.


Fri, 07/08/2011 - 17:09 | 1438350 coppertop
coppertop's picture

its like racism

Fri, 07/08/2011 - 23:00 | 1439046 jeff montanye
jeff montanye's picture

you mean it's.

Sat, 07/09/2011 - 13:35 | 1439796 the tower
the tower's picture

No-one owns Europe... you still do get it do you...

Fri, 07/08/2011 - 16:53 | 1438276 Atomizer
Atomizer's picture

A little background music while your reading article.

Johnny Cash - Ring of fire


Fri, 07/08/2011 - 16:55 | 1438293 Caviar Emptor
Caviar Emptor's picture

But but...can't we lie our way out of this one too?

Say what you will, but we got some of the world's great liars assembled in the ECB and the Fed these days. Hehe even the politicians get baffled! 

So with the combined lying power of the ECB, Fed, IMF, Euro and US politicians, you would think we could just get through another debt crisis one more time

Fri, 07/08/2011 - 17:13 | 1438367 Ghordius
Ghordius's picture

Yes! What is economy: the cooperation of individuals toward a lie: a goal in a future that might exist...
Good liars vs trembling lips...

Fri, 07/08/2011 - 17:23 | 1438391 Caviar Emptor
Caviar Emptor's picture

Yes! But the success of the economy depends on the ability of the liars to stay one step ahead of the truth and the skeptics. So we need really, really olympic level liars to have a great economy. We're in trouble now because these guys started believing their own lies in 2005-2008. "The fundamentals of our economy are sound". And Bernanke thought he could have prevented the Great Depression from his computer, so he got overconfident. Now they realize they have to start lying really well again

Fri, 07/08/2011 - 17:27 | 1438403 coppertop
coppertop's picture

vague, nonspecific, disorganized

Fri, 07/08/2011 - 22:59 | 1439044 jeff montanye
jeff montanye's picture

vague and nonspecific are near synonyms.  redundant.

Sat, 07/09/2011 - 16:00 | 1440111 snowball777
snowball777's picture

Or just billions upon billions of really stupid sheeple.

Fri, 07/08/2011 - 16:55 | 1438297 GeneMarchbanks
GeneMarchbanks's picture

Who were the underwriters on the Italian CDS? I'm actually asking, not being coy. Surely the US banks have some exposure here,no? Tyler?

Fri, 07/08/2011 - 17:10 | 1438354 Milstar
Milstar's picture

It's almost impossible to say without some entity making an annoucement that they are holding the bag.  That will never happen.  CDS's can be created and then sold to other entities so who knows who has what until they are cleared.

Sat, 07/09/2011 - 15:58 | 1440107 snowball777
snowball777's picture

The president would like to order a pepperoni and mushroom cloud. ;) (My dad worked at Teledyne back in the day)

Fri, 07/08/2011 - 16:56 | 1438298 baby_BLYTHE
baby_BLYTHE's picture

It's hard to keep sinking ships afloat

Fri, 07/08/2011 - 18:04 | 1438479 disabledvet
disabledvet's picture


Sun, 07/10/2011 - 17:53 | 1441997 rajat_bhatia
rajat_bhatia's picture


Fri, 07/08/2011 - 18:23 | 1438517 dearth vader
dearth vader's picture

Not when they're already stranded.

Mon, 07/11/2011 - 14:21 | 1444732 mediavirus
mediavirus's picture

Still they'll sink in all the quicksand :)

Fri, 07/08/2011 - 16:57 | 1438304 NotApplicable
NotApplicable's picture

I wonder how much of the France CDS increase has to do with failing to conquer Libya?

Fri, 07/08/2011 - 16:59 | 1438312 Caviar Emptor
Caviar Emptor's picture

Look, US consumers, if you promise to max out all your credit cards at the mall this weekend, then we promise you we'll take care of the banking booboos

Fri, 07/08/2011 - 17:02 | 1438324 bobbydelgreco
bobbydelgreco's picture

this is huge!! western civilzation started in italy & its end begins in italy

Fri, 07/08/2011 - 17:42 | 1438444 richard in norway
richard in norway's picture

someone said that about greece last week


anyhow it's so euro centric

Fri, 07/08/2011 - 17:09 | 1438340 THE DORK OF CORK
THE DORK OF CORK's picture

I always thought Italians had low private debt levels !

Whats the total private debt in Italy ?

Fri, 07/08/2011 - 19:01 | 1438614 NotApplicable
NotApplicable's picture

Doesn't that just mean they have an extra pound of flesh to donate to the cause?

Fri, 07/08/2011 - 23:04 | 1439050 jeff montanye
jeff montanye's picture

also they say their central bank holds a fair slug of gold.

Sun, 07/10/2011 - 17:59 | 1442004 rajat_bhatia
rajat_bhatia's picture

2451  Ton  = $110,306,470,680.00

Fri, 07/08/2011 - 18:05 | 1438485 disabledvet
disabledvet's picture

Huge. Like their love.

Fri, 07/08/2011 - 17:10 | 1438355 coppertop
coppertop's picture

its tough to engineer cross collateral loans in Bulgarian

Fri, 07/08/2011 - 17:25 | 1438398 Traianus Augustus
Traianus Augustus's picture

I want to give a big round of applause to the Markit team that posts their Peripheral Sovereign CDS Pricing table on FT Alphaville!  They are clearly doing their part by not updating the spreads all day today.  I wonder if they got a call from Timmy to just stale it and call it an early weekend!!!

Fri, 07/08/2011 - 17:25 | 1438400 YesWeKahn
YesWeKahn's picture

Bernanke will print all that, no worry.

Fri, 07/08/2011 - 17:41 | 1438440 TheGoodDoctor
TheGoodDoctor's picture

No UK?

Fri, 07/08/2011 - 17:44 | 1438449 YesWeKahn
YesWeKahn's picture

UK currency isn't a part of the Euro.

Fri, 07/08/2011 - 17:47 | 1438454 coppertop
coppertop's picture

that and a gold chain will get you a date with my sister, Mr Crawford

Fri, 07/08/2011 - 17:43 | 1438448 Ivanof
Ivanof's picture

Italy is not Greece or Spain. The main problem with debt is whether it is sustainable or not.

Currently, the Italian debt is under control and the last maneuver provides a return of deficits to zero in 2014.

FMI only few week ago, before Italy decided to take further action, indicated:

" For Italy, the Institute of , after 4.5% in 2010, estimated a deficit-GDP to 4.1% in 2011 (0.2% more 'than the estimates in April) and 3 , 2% in 2012 (0.3% in more '). The , however, after having stood at 119% of GDP in 2010, should go to 120.6% of GDP this year (0.3% more 'compared to April) and 120.3% in 2012 (in this case, 0.3% more 'than the previous estimate)."


Last but not least, Italian debt has an average duration of 5 years and more so there is not a liquidity problem in the short run....


what are we talking about? this is just WRONG speculation...

Fri, 07/08/2011 - 22:05 | 1438965 Arius
Arius's picture

pay no attention .... just scare tactics ... buy, buy, buy... 

Sat, 07/09/2011 - 14:19 | 1439895 Non Passaran
Non Passaran's picture

Yeah show me how they're going to grow out of this debt.

Buy wtf do i know. Like the other guy said - buy buy buy!

Fri, 07/08/2011 - 17:44 | 1438450 bogey4
bogey4's picture

A question for participants in the CDS market.  Aren't they marked to market every day (or week) and the funds to make up the change wired to the party that is "winning" on the trade?  Isn't this why bk's don't result in massive losses to the CDS issuer?  Because the money has already traded hands?

Some clarification would be helpful.

Fri, 07/08/2011 - 18:12 | 1438497 disabledvet
disabledvet's picture

Don't know until the phone rings. After that it's either "it's all good" or "that's our bank now."

Fri, 07/08/2011 - 18:18 | 1438507 jm
jm's picture

Big moves between marks and settlement require counterparties to settle up, and they have to raise cash.  Or a name jumps to default between mark and settlement.  Both put the party on the short side in a pinch.





Fri, 07/08/2011 - 18:27 | 1438525 jmcadg
jmcadg's picture

France - absolutely. Their banks are up to their necks, as much as the Germans.

I still laugh recalling a programme where Christine Legarde criticised Eric Cantona (and his draw out your cash campaign), by saying he should stick to football and leave finance to tyhose who know what they're doing. She's managed to screw France and now she's head of the IMF, how' scary is that. Europe is so fucked. And that includes us here in the UK.

Fri, 07/08/2011 - 18:39 | 1438564 dvp
dvp's picture

This afternoon I found myself musing about perhaps a real possibility.  Default is occurrent or nearly occurrent in Iceland, Ireland, Lithuania, Greece, Spain, Portugal, and now perhaps Italy.  Loans with interest have been issued to those currently deemed the worst off, said loans absurdly coming with interest.  After all, if an economy is in serious trouble, adding interest doesn't make matters better, it makes matters worse.

In any case, there seems real reason to believe it inevitable all of these economies will declare default.  What struck me this afternoon, however, is it making sense for all to do this in coordination at the same time.  Certainly the threat of doing so would shake the EU in particular, and the global economic powers in general.  Doing so, it would quite likely motivate them to pump money into these economies, sans interest. Alternatively, if all declared bankruptcy together, there would be nothing to stop the world economy from collapsing.

Most importantly, investment companies would fail in enormous numbers.  Interestingly, this might be a damn good thing in the long run.  A day or two ago, I asked a historian I know if there were any accepted explanation of the cause of the Great Depression.  He indicated, as I had thought, "no."  Of the attempts to explain it, the most plausible was European investment companies overextending, until default, sucking U.S. investment companies down.  If this is so, the very idea of investment companies need be seriously reconsidered.

Sat, 07/09/2011 - 02:50 | 1439246 AustrianEconomist
AustrianEconomist's picture

It is clear that the Economic
theories in place are outdated, just look at the unemployment report, 99.99% of
professional economist were completely wrong and are all wearing their rose coloured
glasses rather be realistic. The US economy is in huge trouble, that’s a fact.

Check out the latest from the Capital Research Institute (CRI): Creative Destruction – A New Economic Order

Sat, 07/09/2011 - 05:53 | 1439312 Dismal Scientist
Dismal Scientist's picture

Poorly written, even if the intentions behind the piece are valid.

Sat, 07/09/2011 - 04:12 | 1439279 milanitaly
milanitaly's picture

We will stop to issue in the future "BTP 10Y" but only  "BBB 10Y" (Bunga Bunga Bonds)

Sat, 07/09/2011 - 06:24 | 1439317 Peter K
Peter K's picture

It's only sex;) Everybody lies about it. It's not like it was rape. The rape-rape kind of course;)

Sat, 07/09/2011 - 06:27 | 1439318 Peter K
Peter K's picture

It's only sex;) Everybody lies about it. It's not like it was rape. The rape-rape kind of course;)

Sat, 07/09/2011 - 06:31 | 1439321 Peter K
Peter K's picture

It's only sex;) Everybody lies about it. It's not like it was rape. The rape-rape kind of course;)

Sat, 07/09/2011 - 15:51 | 1440090 snowball777
snowball777's picture

CDS for STDs?

Sat, 07/09/2011 - 13:20 | 1439749 CassandraDoomsday
Sun, 07/10/2011 - 17:10 | 1441910 jonytk
jonytk's picture

Yep no one is going to default and Goldman sachs will profit from all this CDS.

unless the EU creates their own rating agency and issue their own CDS.

Sat, 07/09/2011 - 16:42 | 1440174 Use of Weapons
Use of Weapons's picture

In 2009, Mr Berlusconi estimated that over 20 years he had made 2,500 court appearances in 106 trials, at a legal cost of 200m euros.


$797 million fine & he's confirmed that he won't be running in 2013, so it is game on (as strongly suspected by most people, even the Economist called it). Just remember Bettino Craxi... The same old game of L&R / B&R that has no difference.

Sun, 07/10/2011 - 12:22 | 1441405 speconomist
speconomist's picture

GSE, what does it stand for?

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