This Financial Weapon of Mass Destruction Is Ready to Detonate

1 | By Shah Gilani

Buono del Tesoro Poliennale (or BTPs) are Italian long-term treasury bonds – and will soon be financial weapons of mass destruction.

That’s because Italy’s more than $2.3 trillion in public debt, packaged as BTPs, is a bomb ready to blow, with the whole world watching as the seconds tick by.

Unfortunately, the blast radius of this incoming disaster could hit everyone and everything.

It’s not just about Italy, but that should have been obvious on Tuesday. That’s when we saw global markets quake at the thought of the already frenetic Italian politics going rogue and exiting the European Union, if not just dropping the euro.

Here’s what will happen next if this bomb isn’t defused, and how to protect yourself from the fallout…

It’s Not Just About Italy

Of course, Italy exiting the euro would be bad enough for global markets, and excruciating for European markets, banks, and the European Central Bank (ECB).

The only reason Italy would want to exit the euro and not the European Union is to get its own currency, the lira, back. By flipping the euro for lira (which would be worth pennies on the euro in any conversion), everything in Italy would become instantly cheap, especially its exports.

Unfortunately, the first thing to be discounted down to pennies would be BTPs.

If Italy returned to an almost worthless currency, paying back Treasury debts would be impossible. That’s including the billions owed to European banks holding Italian BTPs and the ECB, which not only buys BTPs but also unilaterally guarantees them on behalf of all of the E.U. banks that purchased BTPs.

Hence, a state default would be a given.

[WARNING] Are you missing $23,441?

The European Union would more than likely kick Italy out if it tried to refloat its old currency. So, to not subject itself to humiliation at the hands of the E.U., Italy would skip threatening to quit the euro and more likely threaten to quit the Union altogether.

Of course, that would have the same effect.

That’s why global markets are freaking out. The Five Star Movement and Northern League coalition are, in a very public and heavy-handed way, threatening the E.U. with their own Brexit-type referendum.

So much of what the coalition is demanding is heresy as far as the Union is concerned.

Financial Weapons of Mass Destruction

Some of what the coalition said in a quasi-manifesto over the weekend is what’s got analysts thinking they’ll have to exit the E.U.; none of what’s on their agenda is doable without the rest of the Union members demanding some of the same things.

They want to overhaul all the E.U.’s fiscal and monetary rules, saying, “It’s necessary to review the structure of European economic governance, which is asymmetric, and based on the dominance of the market compared to the broader social and economic dimension.”

None of that’s going to fly.

If you want a full list of their demands, I recommend checking out my Tuesday issue.

This is why Italian bonds sold off so hard this week. To get any of what the coalition wants, they’re going to have to threaten to leave or abandon the European Union completely.

And that means a default.

Not surprisingly, there’s been heavy betting against BTPs lately.

Hedge funds are lining up short positions on BTPs, and the demand to borrow Italian bonds so that they can be shorted has exploded.

Last week saw another $1.2 billion of bonds borrowed.

[CRUCIAL] Thousands of Americans have been short-changed (this is unacceptable)

Short positions in BTPs have increased 33% to $33.3 billion this year, according to HIS Markit. That’s the borrowed amount of BTPs to the highest level since the financial crisis in 2008.

The only thing holding up BTPs now is the ECB.

If the ECB weren’t buying Italian BTPs as part of its quantitative easing, keeping rates on Italian 10-Year bonds so artificially low it’s laughable, they’d be through the roof, and the government would have had to default.

The coalition’s making that a real possibility, one way or another.

BTPs are, at this point, financial weapons of mass destruction.

While it’s highly unlikely that any Italian government would be insane enough to attempt a maneuver this risky and blow the country’s national debt into tiny bits of worthless paper, it is Italy… And since they’re on their 66th government since WWII, anything’s possible.

You’ve been warned.



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One Response to This Financial Weapon of Mass Destruction Is Ready to Detonate

  1. Christian Kircher says:

    this indeed is a very scary announcement you do here and the situation looks frightening. Now what I dont really get in this picture is who really owns these BTPs beside the european central bank. other banks in europe as I understood from your article. but in which high? percentage? amount? do you have some more details about to tell us? would be very interesting to see which banks are the most exposed to that thread. that the deutsche bank is in a very bad situation we know already and some french banks are not much better. italian banks did already disappear. spain is in a tricky moment too with a weak governement now

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