Wednesday, November 9, 2011

Berlusconi out, not because of "bunga bunga" but bonda bonda

After sticking around what seemed like forever, and beating off one sleaze scandal after another, the world's most powerful womanizer, Silvio Berlusconi, has finally said he's going to resign after bond markets pushed up the yield of Italy's 10 year bonds to 7.25% (according to Bloomberg).   Compare that huge rate with fellow euro traveller Germany with a yield of just 1.7% -- practically giving it away.

This of course is because Germany has since World War II operated mostly on a pay as you go basis -- revenues match expenditures and borrowings if necessary are short term and paid back as quickly as possible.   Long term bonds are issued but it's not uncommon for Germany to retire them early.

For a populist, even a right wing one like Silvio, making every one live like a king means doing some truly irresponsible things on the backs of first the taxpayers and then the bondholders.    The difference of course is that the taxpayers, the citizens of a country, can always get rid of their rulers.   Bondholders often have little recourse but to dump their bonds, often at a loss or break-even if they get lucky.    The break-even point right this morning, for Italy to avoid default, sez Bloomberg, is 5.62%.

It's easy to forget that it could happen here.   We went through one round of austerity measures in Canada in the 1990s.    We could again unless we build a few firewalls here and there to stop the contagion from spreading here.   America's credit is at the breaking point as well, and the sneeze from them and Europe will make us catch cold big time.

For now, in any case, I say good riddance to the king of bunga.  It was bad enough he disgraced himself, now he may have taken an entire civilization back to the Dark Ages for another 1400 years.

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