eurozone debt crisis

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Too-Big-To-Save: Italy Totters on Debt Crisis Cliff

With its 10-year bond yields nearing 7%, Italy's debt is becoming a burden it will no longer be able to handle as it follows the same path as Portugal, Ireland and Greece.

However, Italy's economy - seven times larger than Greece's, nine times larger than Portugal's and 10 times larger than Ireland's - is too big for the Eurozone to rescue.

And because Italy's economy is so large - the third-largest in the Eurozone and the eighth-largest in the world - a default on its sovereign debt would be that much more calamitous.

Yesterday (Tuesday), yields on Italy's 10-year bonds hit 6.77%, a record for Italy in the era of the European Union (EU).

"Now we are really reaching very dangerous levels...We are above yield levels in the 10-year where Portugal and Greece andIrelandissued their last bonds," Alessandro Giansanti, a rate strategist at ING Groep N.V. (NYSE ADR: ING), told Reuters.

The spike in yields reflects rising investor concern that besieged Prime Minister Silvio Berlusconi doesn't have the political muscle to push through the tough budget measures Italy needs, such as pension cuts, to get its debt issues under control.

Those fears were further stoked yesterday when Berlusconi was unable to win a majority on a routine vote on a budget report, but eased when Berlusconi agreed to resign. Yields dipped slightly on Monday in response to rumors that Berlusconi might step down.

"The market's bias is fairly clear. The question is; what comes afterward, assuming he falls?"Peter Schaffrik, head of European rates strategy atRBC Capital Marketsin London, told Bloomberg News.


If Italy's bond yields don't fall significantly, it won't matter who's running the country. The high yields are making Italy's ability to cope with its debt increasingly infeasible.

At 120% of gross domestic product (GDP), Italy's debt load is second only to Greece's among Eurozone nations. Its total debt of $2.7 trillion is the eighth-highest in the world.

As bond yields go up, the cost of rolling over this massive amount of debt increases as well, and is nearing unsustainable levels.

Italy needs to auction $41.5 billion (30 billion euros) of debt less than a week from now, Nov. 14, and another $31.13 billion (22.5 billion euros) in December. Next year Italy will need to borrow $415 billion (300 billion euros).

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MF Global Bankruptcy Exposes Vulnerability of U.S. Banks to Eurozone Debt Crisis

The bankruptcy of MF Global Holdings (NYSE: MF) was a distressing signal to investors that it is possible for U.S. financial institutions to fall victim to the Eurozone debt crisis.

MF Global filed for Chapter 11 bankruptcy Monday after credit downgrades led to margin calls on some of the $6.3 billion in Eurozone sovereign debt the bank held. The position was five-times MF Global's equity.

Although the major U.S. banks have less exposure relative to available capital, their many tendrils in Europe - particularly to European banks - will inevitably drag them into any financial meltdown in the Eurozone.

Even the U.S. banks' estimated direct exposure to the troubled European nations of Portugal, Ireland, Italy, Greece and Spain (PIIGS) is disturbingly high - equal to nearly 5% of total U.S. banking assets, according to the Congressional Research Service (CRS).

And according to the Bank for International Settlements (BIS), U.S. banks actually increased their exposure to PIIGS debt by 20% over the first six months of 2011.

But the greatest risk is the multiple links most large U.S. banks have to their European counterparts - many of which hold a great deal of PIIGS debt.

"Given that U.S. banks have an estimated loan exposure to German and Frenchbanks in excess of $1.2 trillion and direct exposure to the PIIGS valued at $641billion, a collapse of a major European bank could produce similar problems inU.S. institutions," a CRS research report said earlier this month.

Of course, the major banks say their exposure to the Eurozone debt crisis is much lower because they've bought credit-default swaps (CDS) to hedge their positions. Credit-default swaps are essentially insurance policies that pay off in the event of a default.

Unfortunately, this same strategy was one of the root causes of the 2008 financial crisis involving American International Group (NYSE: AIG) and Lehman Bros.

"Risk isn't going to evaporate through these trades," Frederick Cannon, director of research at investment bank Keefe, Bruyette & Woods Inc., told Bloomberg News. "The big problem with all these gross exposures is counterparty risk. When the CDS is triggered due to default, will those counterparties be standing? If everybody is buying from each other, who's ultimately going to pay for the losses?"

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Spain's Economic Crisis Shows the Eurozone Can't Escape its Debt Trap

Fresh evidence of Spain's deepening economic crisis has revived fears about that nation's ability to dig out of its sovereign debt problems, and illustrates why the Eurozone debt crisis is likely to drag on for years.

Spain's gross domestic product (GDP) was flat in the third quarter, the country's central bank said yesterday (Monday). That follows anemic growth of 0.4% in the first quarter and 0.2% in the second quarter.

Even more troubling is the nation's unemployment rate, which rose to 22.6% in September - the highest in the Eurozone.

As one of the PIIGS (Portugal, Ireland, Italy, Greece and Spain), Spain has been trying to wrestle down its high sovereign debt with austerity measures. Unfortunately, those measures are driving the Spanish economy toward recession, which is making it impossible for the government to hit its budget deficit reduction targets.

"It will be very difficult to meet the deficit goals without additional austerity, which might push the economy back into recession," Ben May, a European economist atCapital EconomicsinLondon, told Bloomberg News. May thinks Spanish unemployment could go as high as 25%.

Each of the PIIGS faces the same cycle of futility - economy-killing austerity measures that erode the nations' ability to cope with their debt issues, necessitating even deeper austerity measures.

But without the economic growth to create the wealth to cope with the budget deficits, the Eurozone debt crisis will gobble the PIIGS up one by one.

Like Greece

In Greece's case, its faltering economy led to a series of bailouts from the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB), to avoid default.

But the Greek economy is among the Eurozone's smallest. If the other PIIGS, particularly Italy and Spain, descend to where Greece has fallen, there won't be enough money to rescue them.

"Unless European economies outgrow their deficits, the chance of rolling bailouts working is slim to none," said Money Morning Capital Wave Strategist Shah Gilani.

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Does the Eurozone Have Its Own Lehman Bros?

Does the Eurozone have its own American International Group Inc. (NYSE: AIG), or worse, its own Lehman Bros. when it comes to Greece?

I believe it does.

Why else would the European Union have bent over backwards to "save" a member nation that: A) Accounts for 2.01% of the EU by trade volume; and B) Would essentially be like letting Montana go out of business - no offense to Montanans or Montana!

More to the point, if things really were under control, why would European Central Bank President Jean-Claude Trichet say that risk signals for financial stability in the euro area are flashing "red" as he did following a meeting of the European Systemic Risk Board in Frankfurt?

The short answer: Because he knows what the European banks are desperately trying to hide from the rest of the world - that there are still enormous risks and they're even more concentrated now than they were in 2008 at the start of the financial crisis.

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European Debt Crisis: How to Profit No Matter What Happens

Since the European debt crisis first emerged in early 2010, it has dominated headlines, roiled the world financial markets, and has kept investors in a perpetual state of alert as they wait for the next shoe to drop.

But let me share with you a little-known secret: Investors who understand where the "fault lines" are forming in this Eurozone debacle can transform the biggest sovereign-debt crisis in years into a major profit opportunity.

Let me explain...


For the one investment that will let you profit from the EU debt crisis, please read on..