Niels just told you to ignore Egan-Jones at your peril earlier today. As luck would have it, just as that post went out Sean Egan, co-head of Egan Jones, was on CNBC as a guest host for an hour. Egan-Jones is a credit ratings agency that does not a huge conflict of interest because it is not paid by the companies it rates. And, as Niels points out, unlike its competitors, Egan-Jones actually has a good track record.
What’s he saying? He’s saying what I’m saying:
Forget about Berlusconi and austerity in Italy. That’s a sideshow too. Austerity is not going to bring Italian yields back down. These days are over, folks.
This is a rolling debt crisis brought about because of debt and deficit concerns for debtors who lack a lender of last resort. Think about it; in the euro area, banks have been getting more support from the ECB than the sovereign governments. So, one by one, all the sovereign debtors are going to get picked off. Now it’s Italy’s turn in the penalty box. And the euro zone crisis with Italy is now existential. Here’s what Egan says:
“If a country isn’t growing, it’s debt is growing as a result. So, any interest beyond, let’s say 2.5%, is a problem. And with Italy’s growth shrinking, as a result of the austerity measures they’re putting in place, we’re beyond it. Basically if it doesn’t come down in the very near future, we’ve gone from the Greece problem to the Italy and possibly Spain problem.”
For the record, Egan sees 90% haircuts in Greece, eventually. And he says that 6% is the point of no return. If you look at the debt crises in Greece, Ireland, and Portugal, once you hit 6%, the interest rate death spiral kicked in as insolvency was self-fulfilling. That’s how it works when no lender of last resort steps in. It works the same way for financial institutions too. You wanna know why MF Global went under? There it is.
Listen to what Egan has to say in the video clips below. Sobering stuff