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National Inflation Association
Italy's 10 year bond yields rose above 7% on Wednesday and economists from around the world are now proclaiming that these interest rates are unsustainable with Italy's national debt now 120% of its GDP. NIA believes the ECB is currently working on their largest bailout in history where they will commit to purchasing over €1 trillion of Italian bonds and bonds of other eurozone countries that are at risk of becoming insolvent. Despite the signals currently being given by the ECB, they will not allow Italy to fail because it will cause a Great Depression throughout the European Union, which will lead to the destruction of the eurozone.
Economists today fail to realize that 10 year bond yields of 7% are normal for not just Italy, but the rest of the eurozone and the United States. If it wasn't for the ECB holding their benchmark interest rate at artificially low levels for over a decade, Italy and other eurozone countries wouldn't have the high levels of debt they do today and they would be able to withstand yields of 7% or higher. The ECB is entirely at fault for the European Debt Crisis and they are about to follow in the footsteps of the Federal Reserve by abandoning their objective of maintaining price stability and keeping inflation low.
German 10 year bond yields declined again today to 1.72% and the spread between Germany and Italy is at a new record of 553 basis points. Germany is benefiting from safe haven buying from investors selling Italian bonds and buying German bonds, but investors will soon realize that German bonds are no better than Italian bonds and the world will dump all Euro denominated bonds.
Bond investors currently expect very little inflation in the eurozone, as seen by Germany's low bond yields. The sole reason for the large spread between German and Italian bonds is Italy's greater risk of default. However, a default by Italy would lead to the failure of Germany's largest banks. Germany knows this but they don't want to raise inflation expectations by making the world think that the ECB will be monetizing Italy's debt. Therefore, Germany is now telling Italy to request aid from the European Financial Stability Facility (EFSF) if needed.
Unfortunately, the EFSF doesn't have the financial resources to rescue a country the size of Italy. Last week, the EFSF had to cancel a €3 billion auction of 10 year bonds due to a lack of investor interest. On Monday, the EFSF finally had the bond sale, but was met with subdued interest that barely covered the €3 billion in bonds being offered. So far the EFSF has only raised a total of €13 billion through bond sales, but has received €440 billion in guarantees from eurozone countries. If Italy becomes a recipient of EFSF funding, the EFSF will lose one of their largest contributors.
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