Tags: Kotok | Italy | Greece | europe

David Kotok: Italy Could Fall Next as Greece, Spain Portugal Are Lost Causes

Thursday, 17 May 2012 07:36 AM

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Greece may be grabbing headlines these days thanks to its escalating debt crisis that's threatening to lead the country out of the eurozone.

Fears the Spain and Portugal may follow a Greek exit have investors on edge as well, but the real nightmare is in Italy, says David Kotok, chairman and chief investment officer at Cumberland Advisors.

Italy is much larger than any of the periphery economies in Europe, which are lost cause anyway as evidenced by spiking yields in Spanish government debt markets.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

Many have written off Greece, pointing out a recent failure among political parties to create coalition government will lead to an eventual rejection of austerity measures and withdrawal from the currency zone.

Fears that such a move might pressure Spain and Portugal to default as well and leave the currency zone, but investors should be more afraid of an eventual Italian collapse.

The Italian economy is shrinking and the country's debt-to-GDP ratio has topped 120 percent, which makes growth difficult in such a large economy.

"Italy is the one to watch," Kotok says, according to Business Insider.
"It is the 800-pound gorilla and it is sick."

Yields on Italian 10-year bonds hit 5.87 percent in recent trading, the highest since Feb. 16., according to Bloomberg data, while the safe-haven German 10-year yield was hovering around 1.47 percent.

"I recall that the difference between the ten-year German bond yield and the 10-year Italian bond yield once reached nine basis points. That is correct: 9 basis points," Kotok says. (One basis point is equivalent to 0.01 percent, or one-hundredth of a percentage point.)

"Italy is the world’s third largest debtor. The test of 'too big to fail' will come with Italy."

The International Monetary Fund, a multilateral lender of last resort, feels comfortable with Italy for now and praises economic reforms undertaken by Prime Minister Mario Monti.

"The progress is really a model when considering progress across Europe," says IMF director for Europe Reza Moghadam, according to the AFP newswire.

"But the job is not yet done," Moghadam adds. "There has to be more effort to revive growth."

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.



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