Mama Mia! Things gettin' ugly Santino

Last week I posted a review on Italy's current debt situation and the Chinese intervention. And yesterday evening the country saw its credit ratings downgraded by Standard & Poor's to A from A+ with a negative outlook "on concern that weakening economic growth and a fragile government mean the nation won't be able to reduce the euro-region's second largest debt burden".

Also, Italy's GDP has grown at an average rate of 0.2% from 2001 to 2010, vs 1.1% in the Euro Zone. This year only, its first quarter GDP showed a slight growth of 0.1%, and the second quarter +0.3% 

So what does this mean? Well, it means we're walking on thin ice. You see, Italy is bigger than Greece. Yeah, of course some banks (mostly French) have Greek paper, but Italy is a different story since it has 2.2 trillion Euros in outstanding debt; that's 25% of the total debt issued by the European Union.

The point is, Greece will default, they're done, and that will only translate into lack of funding and therefore insolvency for countries like Italy; then obviously financial institutions hold all these bills, and that means there will be writedowns... and well, kind of the story we saw three years ago, only this time it isn't mortgage-backed securities, it's "country-backed securities".

To get the picture, please look at the graph shown below. That's a World Countries Debt Monitor taken from Bloomberg LP. You'll see displayed the outstanding debt of each country in USD, from most to least. Next column you have the 5 year CDS', then credit ratings, exchange rate, and finally (I find this column very interesting) the percentage of Debt in relation to each country's GDP.

So, there it is. As you can see Italy is the third country (developed markets) with the biggest debt of $2.16 trillion dollars. Its 5 year CDS' are already showing a spread of 488 (bigger than Spain's 405) And here's the interesting part: Italian debt represents 118% of its GDP. There are only other four with a simmilar situation: Japan (226%) Singapore (102%) Iceland (124%) and Greece (144%) As we can see, Spain isn't such a huge problem; I'd rather pay more attention to France...

I'm not saying Italy will default, I'm just saying we're in for a bumpy ride. I wouldn't get into equity markets yet, even with valuations as attractive as they are. I'd stay liquid and amount even more liquidity. Normally I'd say "put it all in T-Bonds" but then again, Will the U.S. fall into a double-dip?