Sunday, October 30, 2011

Festival della Scienza Genova and Italy: final thoughts

Here are the "official" video links from the Festival della Scienza in Genova: my public lecture , interview.

I had a wonderful time in Genova. My visit wasn't very long, because I had to come back to teach.

On the trip I spoke to quite a few young Italians (young here is probably, err, 35 and below), who all expressed pessimism about the future of the country and the economy. On the other hand, at the fancy dinners with Genovese families, I met a number of wealthy business types who reassured me that Italy would be fine and would have no trouble servicing its debt.

On Friday equity markets rallied in relief after the announcement of the latest plan to deal with the Euro debt crisis. However, ominously, bond investors demanded higher rates for Italian 10 year debt.

WSJ: ... Those sorts of concerns played out in Italy's €7.935 billion debt sale on Friday. On each of the four bond issues it sold, Italy was forced to pay higher yields than in the recent past. Most significantly, 10-year debt—a market benchmark—was sold at a yield 6.06%, up from 5.86% only a month ago.

"With a 120% debt-to-GDP ratio and 10-year Italian bonds yielding roughly 6%, they can't do that forever or the borrowing costs will get to an unsustainable level," said Eric Stein, portfolio manager at the Eaton Vance Global Macro Absolute Return Fund. "As your rates go up, it means you're paying more and more to service your debt, and your whole debt dynamics become harder and harder and harder.

As often noted by professionals, equity markets are driven by emotion, whereas bond markets are driven by quantitative analysis.


LondonYoung said...

Your young and pessimistic Italian friends may have a legitimate reason to differ with their elders.  Italy's budget is in primary balance - which means that their deficit is caused only by the need to pay interest on the existing stock of debt.  The classic case of the young paying off debts incurred by the old.  Bond holders beware.

reservoir_dogs said...

From all indication, at least in the beginning of the crisis, Italy was perhapse in the best shape among the piigs. However, in the depth of the financial crisis, an investment bank like Goldman was still in trouble and needed bail out from Warren Buffett. I think in the end, the Italians will succomb to the market forces(fears). They need growth to fix their debt problem and in the next few years, I don't know where that growth will come from.

KenC said...

"Bond holders beware.”
Someone either forgot to tell that to Jon Corzine-- or he forgot to listen.

Guy_Brodude said...

Where will it come from in Greece, Spain, Portugal? Anywhere in Europe for that matter? And in the United States as well?

reservoir_dogs said...

I agree with you about the other piigs. They are all headed for default of some kind like Greece. The rest of Europe may not be growing, but they have stronger balance sheets. The United States may not be growing much for the next few years either, but we have other tools (like inflation) which the piigs don't have(unless they leave the Euro). What is more, the U.S. has gone through the worst of the financial problems and should be on the mend over the next couple of years.

LondonYoung said...

something about "pride cometh before a fall" or some such ... what an ass

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