Italy is 2 percentage points from disaster, evolution says

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.”

Source: BusinessWeek.com