KOTOK: We Have Bigger Worries Than Greece, Portugal and Spain

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Photo: Friar’s Balsam on flickr

In his latest column, Cumberland Advisors’ founder David Kotok advises his audience that the peripheral Eurozone countries are already a lost cause; it is now Italy that has begun to teeter.Greece, he writes, is doomed. Portugal and Spain are already getting killed in credit markets.

“Italy is the one to watch,” he says. “It is the 800-pound gorilla and it is sick.”

Growth, deficits, demographics and a 120% debt-to-GDP ratio are causing it to become unmoored.

Its economy is shrinking, not growing.   It has failed to rein back the public expenditures.  Its demographic composition is impossible to balance with a debt-to-GDP ratio above 120%.  

“Credit spreads with Italy are widening. I recall that the difference between the 10-year German bond yield and the 10-year Italian bond yield once reached nine basis points. That is correct: 9 basis points.   The charts start on page 27 of my old book and depict the good old days. That was only 7 years ago.   Look at today’s pricing vs. the old pricing and play the movie backwards and one can see where this is headed.  Things are going to get worse.”

Bottom line: “Italy is the world’s third largest debtor.   The test of ‘too big to fail’ will come with Italy.”

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