Long Italy - short France... and not because Italy is better shape... No way... The point is simply the spreads
According to the spreads (against the
Deutsche Bund) here is how closely they stack (in basis points)
Italy 350
France 70
Is Italy really 5 times riskier than
France?
So something is got to give. F
a) Things get bad, ECB intervenes to stop a run on Italy, France gets infected increasing its spread to level it to that of Italy, or
b) Things get better, Italy's spread goes down to match France's
There is always c) ECB dumps the PIIGS (Italy included) and let everybody fend for him/herself...
Just for the fun here is where the PIGS stand
Portugal 995
Ireland 575
Greece 2,227
Spain 298
And Belgium, courtesy of Dexia
195
To me, it seems like these spreads are
priced as if there was no correlation between debtors, just as the CDOs were
before 2008. The problem is that given that one country goes belly up, the
probability of the next one going under is much higher.
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