And relevant not just to Italy but further afield as well.
Dan McCrum at FT Alphaville, June 4, 2018:
Judged by the market where investors go to “insure” Italian sovereign bonds against default, many have started to feel a little nervous since attempts to form a government offered a reminder that political and economic tensions related to the country's debt load might eventually take it out of the euro.
The annual cost of the premium on a five-year credit default swap referencing Italian debt is still far from crisis era records, but it has spiked. Here's the chart, courtesy of Heartwood Investment Management's Graham Bishop:
As Bishop said:
Given the country’s indebtedness (the ratio of debt to GDP is the fourth highest in the world) and relatively weak growth backdrop, it’s small wonder that investors are beginning to price in the negative implications of an Italian exit. This has entailed higher bond yields, a weaker currency (in this case expressed via the euro), wider credit spreads and lower equity prices.A specialist boutique like Heartwood can simply avoid Italian debt. For those looking to offset, or hedge, exposure to the country, some protection could be found by buying 2014 contracts of sovereign CDS instead of 2003 contracts, but that could become an expensive trade.
Philippos Kassimatis of Maven Global, a boutique which advises on hedging strategies, suggested the alternative of buying currency volatility, particularly that of the euro versus the dollar:
The trade is one of the cheaper ways to position for eurozone problems, he told us, and also has the benefit of not being entirely Italy specific. (Feel free to debate the right and/or wrong hedging strategies in the comments)........MORE, some of the comments are worthwhile as well although I'm a bit surprised no one brought up the meta-solution Goldman Sachs strategy used to to get Greece into the EMU:
Credit disguised as a swap and that deficit and debt come right down.Are you listening Italy?
They don't call it the Vampiro Calamari for nothing you know.
