Interest rates on troubled sovereign debt such as Italy is rising because lenders are fearful such countries will be excused from their debt… or won't get bailed out again. Much of this sovereign debt has been purchased on leverage -making a default unthinkable- and there is now a scramble out of these bonds because no one wants an ‘MF Global experience'. cheat cards
A critical point to make here is that insurance policies had been taken out on Greek bonds specifically to avoid an ‘MF Global experience'. These insurance policies have a fancy name; Credit Default Swap, better known as a CDS. The idea was that even if Greece did default on its debts the insurance policies would kick in and pay off the bond holders. But, the insurance did not kick in. Instead the rules were changed!
The rules were interpreted to say that half a default is not a default. Why were the rules changed? Because for the very same reason that Jon Corzine thought Greek bonds were safe, the people who sold the insurance policies (the CDSs) thought they would never have to pay off. It is highly likely the rules were changed because a lot more institutions than MF Global would have gone down if a payout had been required. It would easily have been 2008 on steroids if they had played according to the rules. So, the CDS bluff has been called and the players did not ante up. The name of the game has therefore changed. infrared ink
As the going gets rough, people in positions of power are changing lots of rules. Remember that. This is another reason why the interest paid on Italian debt is rising and why trust in the entire system is eroding. There are other reasons of course, like all the political turmoil in Italy and Greece. But be sure to put the horse before the cart here; the climax of political turmoil taking place in Europe, and soon America, is due to the growing uncertainty about financing sovereign debt… not the other way around. If the political crisis had been allowed to play out earlier we may not be here now.
