BRIDGEWATER: Italy Could Blow Up The Euro

thenews 2013.04.06 12:29

Judging by the purchasing frenzy of Italian bonds today, most of it emanating out of Japan, which, after last night's epic snafu involving JGBs and the double halt of bond trading, may have spooked the "New BOJ-frontrunning Normal" Mrs. Watanabe, not to mention Albert Edwards' recent rekindled love affair with the Mediterranean country, one may have left with the impression that all is well, and Italy is "safe." Not so fast: according to Bridgewater, the world's biggest hedge fund (after the ECB and the NY Fed of course), whose daily letter today is titled "Could Italy Blow Up The Euro?" things in Italy are hardly as rosy as market conditions make them appear (although as the BOE itself admitted, any link the policy vehicle known as the "market" may have had with economic fundamentals is long gone), and in fact may be set to get far worse.

Some of the key highlights:

Economic conditions in Italy are as depressed as they've been since the end of WWII, the economy is still contracting, Italy's banks are in terrible shape, private sector lending is very strained, and the ECB's policy is not resolving the problems. As is typical in countries enduring this level of economic pain, the political situation is starting to get pretty chaotic. Bersani, the top vote getter in the recent elections, has been unable to form a government, new elections this year are increasingly likely, and recent polling suggests a dead heat among Bersani, Berlusconi, and the anti-establishment party of Grillo.