Italian Rates Over 6 Percent May Be Danger Sign

Back to the "weak going into the European close" trade.

Lows of the day as Europe markets closed at 12:30pm ET, and the focus is on the Italian 10-year yield, now well north of 6 percent.

Bottom line: sovereign credit spreads continue to widen. "If EU credit players don't believe in the 'plan' why should we?," one trader said to me this morning.

What is so special about 6 percent? To a certain extent, interest rates over 6 percent are being viewed as a referendum on the Berlusconi government.

But there's something more important:

it's not a magical number, but it "gets you closer to the 7% threshold, at which point Portugal, Ireland and Greece all lost access to markets, and the cost of debt became unsustainable," one trader wrote to me.

How unsustainable? One trader wrote to me that in 2011 Italy, was intended to pay 73 billion euros in interest at an average rate of 4 percent. But if the average rate went to 6 percent, that would increase rate costs by 50 percent — another $35 billion!

Italy has nearly 500 billion euros in debt it needs to refinance in the next two years. It is unlikely to be able to make a dent in its debt-to-GDP ratio with interest rates at these levels.

Throw in low growth rates — which Italy has had for years — and higher funding costs for banks (they price on a spread to sovereigns) and you have a triple whammy.

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