Monday, July 11, 2011 my comments are in italics Italy the FT talks about how hedge funds are

re placing large bets against the value of Italian debt, directly shorting the bonds of the eurozones 3rd largest economy. Funds have increased the size of short positions in the last month. Investors are shorting Italian bonds outright rather than use CDS (many hedge funds are calling into question the value of CDS after the current situation in Greece where it looks like payouts wont be triggered). FT the general thinking has been Spain before Italy but that is now changing, perhaps in part because of the data below, which show Italy to be completely off the regression. The reason Italy has not been punished for its debt/GDP levels is because most of their debt is funded domestically, much like Japan. Thus, they have been able to fund their debt at lower rates via their citizens. What if that changes and Italy has to roll debt to less forgiving global capital markets?

Spreads vs Debt/GDP
16.00% 14.00% Spreads over German Bunds 12.00% 10.00% Greece 8.00% 6.00% 4.00% 2.00% 0.00% 50.00% 70.00% 90.00% 110.00% 130.00% 150.00% Portugal Ireland Spain Italy

Debt/GDP

European officials continue to evolve their thinking on the Greek debt situation if a selective default cant be avoided then make the most of it and push for a massive reduction in the countrys indebtedness. Officials are now open to an outright Greek default as part of a broader effort to cut the countrys overall debt levels. The French Plan for Greek banks could wind up getting abandoned in favor of the German Plan (which entails a larger swap of existing Greek debt for new longer-maturity paper). Officials would also provide funding for Greece to purchase some of its (deeply discounted) debt in the secondary market. FT the market has been viewing a Greek default as inevitable. Officials met at the White House Sunday night (the gathering lasted only 75 minutes) but failed to reach an agreement on key elements of a plan, even at the smaller $2T level. The WSJ says the tone of Suns meeting was tense and confrontational at times while the Washington Post says current talks are deadlocked. Officials from both parties didnt make much progress towards reaching a deal. WSJ/NYT/Politico/WaPo Geithner warned that the financial markets could soon begin to react with concern, which could drive up interest rates and make borrowing more expensive. WSJ