And the Next Country to Fall in Europe Will Be…

 

I have to tell you, I thought it would be Spain. My thinking of the order in which the sovereign debt crisis would engulf Europe was first Greece, then Spain, then Italy.

But it looks like I was wrong. Italy, home of my favorite Italian wine, is next.

It all started on June 18 when Moody’s Investor Services said that it was weighing whether to cut Italy’s credit rating. Since then, government bond yields have been rising in Italy.

Italy has regained only a small fraction of the gross domestic product (GDP) growth it lost during the global recession (Italian GDP in the first quarter of 2011 rose only one-tenth of one percent over first-quarter 2010 GDP). Unemployment is high. Interest rates are rising and a sex-scandal-plagued Silvio Berlusconi is occupied with trying to maintain his position as Prime Minister as uncertainty over his capacity to govern rises.

Here’s why I believe the sovereign debt infection is spreading to Italy.

Yesterday, the shares of Italy’s forth largest bank, Unione di Banche Italiane, fell five percent to 3.63 euros—below what it had priced its shares in a one-billion euro rights offering it was trying to close yesterday.

The stock price of Italy’s largest bank, UniCredit, was down about nine percent yesterday. Intesa Sanpaolo, the country’s second largest bank, saw its stock price tumble seven percent yesterday.

When the stock prices of major banks fall so quickly, investor panic usually sets in. And that may be the situation in Italy right now. Moody’s Investor Services said Thursday that it may downgrade the credit rating of 13 large Italian banks.

It looks like the bond vigilantes are closing in on their next target. Poor euro; how will it ever get a break?

Michael’s Personal Notes:

What a day for the stock market Thursday…

First we had the International Energy Agency (IEA) announce that it would release 60 million barrels of oil into the marketplace. That pushed stock and commodity prices severely lower. Then Greece announced that it has struck an austerity deal, which brought stock prices back the other way.

Why the IEA is releasing so much oil is a mystery to me. I’ve read all the news reports last night and this morning, but I just don’t get it. This oil is being released from “emergency oil supplies.”

Some reports said the oil was being released to reduce the shortage of oil caused by loss of production in Libya. But the market reacted as if this was an oversupply situation. After all, Saudi Arabia is increasing its oil production to near record daily levels.

There are obviously some political motives behind the scenes here…so I’ll just leave it…

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