Trader Talk

Italian Debt Math Doesn't Add Up


Europe: you can't get away from it. There's a good reason the Italian debt auction has market participants worried: the math does not add up, and there is no immediate summit on the distance that will change the math.

Here's the facts:

1) Italy's five-year bond auction cost them a record 6.47 percent. 2) Italy's is currently paying an average of 4.13 percent on its debt. 3) Italy has 326 billion euros of debt it needs to roll over next year. 4) Prime Minister Mario Monti says he needs 30 billion euros to fix their current deficit by 2013.

Here's the math: If Italy has to pay on average what it is paying for today's 5-year auction (6.5 percent, rounded off), it will add about 5 billion euros in extra interest payments.

Needless to say, Monti's 30 billion euros needed to close the budget gap does not take into consideration the extra funding costs Italy will likely be required to absorb. That 30 billion euros does not likely include 5 billion in extra interest.


1) A bad day for commodities: copper, gold, aluminum down 3-5 percent, with silver down 7 percent. For the speed of the move, a lot of it looks technical. Gold breaks below 200-day moving average for first time in three years. Stops around $1,593 broken. $1,536 was the recent intraday low we hit in September.

But it's not just technical. Physical demand seems to be lower....Asian demand seems lower recently, according to gold trading desks.

Speaking of commodities: Joy Global (JOY), one of the world's largest manufacturers of mining equipment, out with its earnings today, but the focus is on the long and detailed discussion of commodities in 2012.

The bad news: "slowing global growth is tempering the demand for mined commodities," and that potentially lower commodity prices might lead to "higher cost producers being squeezed out." This is the main reason the stock is down 9 percent.

The good news: not much excess capacity in mines. Mines will need to restock in 2012, because inventories are below projected demand levels. Copper prices should remain above $3.50 (currently $3.31).


1) Kyle Bass from Hayman Capital on with David Faber this morning, reiterating positions he has held for some time on Europe:

a) debt restructuring is the only realistic way out. The European Monetary Union (EMU-the euro) will have to break up — very difficult to go through a hard restructuring without a currency adjustment. That is what has worked historically.

b) Capital mobility is the key. We are already seeing large-scale deposit runs. The Greek national banks announced they had lost 4.5% of their deposits in October.

c) The bill is coming due, and no one can pay it. $2.6 trillion of total debt rolling over in the eurozone next year. There are no buyers of any size. There are no buyers of peripheral bonds.

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