September 12, 2011

Greece Default Risk is at 98% and Italy turns to lobbying China for a Bailout

1. Greece’s chance of default in the next five years has soared to 98 percent as Prime Minister George Papandreou fails to reassure international investors that his country can survive the euro-region crisis. It now costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greek debt for five years using credit-default swaps, up from $5.5 million. The default probability for Greece is based on a standard pricing model that assumes investors would recover 40 percent of the bonds’ face value were Greece to fail to meet its obligations.

2. Italy’s centre-right government is turning to cash-rich China in the hope that Beijing will help rescue it from financial crisis by making “significant” purchases of Italian bonds and investments in strategic companies.




According to Italian officials, Lou Jiwei, chairman of China Investment Corp, one of the world’s largest sovereign wealth funds, led a delegation to Rome last week for talks with Giulio Tremonti, finance minister, and Italy’s Cassa Depositi e Prestiti, a state-controlled entity that has established an Italian Strategic Fund open to foreign investors.

Italian officials were in Beijing two weeks ago to meet CIC and China’s State Administration of Foreign Exchange (Safe), which manages the bulk of China’s $3,200bn foreign exchange reserves. Vittorio Grilli, head of treasury, met Chinese investors in Beijing in August. Italian officials said further negotiations were expected to take place soon.

The possibility of Chinese investment comes at a critical moment for Italy, as markets demand increasingly high yields to buy Italian public sector debt, projected to reach 120 per cent of GDP this year, a ratio second only to Greece in the eurozone.

Mr Tremonti has written extensively in the past about his fears of China’s “reverse colonisation” of Europe. But he has been driven to seek new alternatives as Europe prevaricates over strengthening its bail-out fund and the European Central Bank warns that its month-old bond-buying programme cannot go on indefinitely. In a reflection of Italy’s refinancing problems, the treasury on Monday sold €11.5bn of short-term notes at higher yields.

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