The thing that makes writing about Forex and investing so fascinating is that things can change in an instant – fortunes can be won and lost on the turn of a single piece of news (like the one about Italy becoming the new Greece, but more on that in a moment).
Last week for example, I wrote about the Greek debt crisis and how it turned out that those who bought Greek debt in the past few months made out pretty well for themselves. Greek sovereign debt had been trading for as little as 30 Eurocents on the Euro and a deal had been announced to allow the debt to be paid off at 50 Eurocents on the Euro – a tidy profit indeed.
Then, before my post went live, the Greeks threw a wrench into my careful analysis and decided to hold a referendum which cast doubt on the money being paid back even at half of face value. Ultimately of course the Greeks backed down from the referendum and it looks like the deal is back on track, but it's still on somewhat shaky ground.
Now It's the Italian's Turn?
Readers may recall last week that I mentioned liking Italian and Spanish sovereign debt as places to invest. Sure enough, those who heeded my suggestion early last week made a nice profit as Italian sovereign debt suddenly started paying huge interest rates, north of 7%. The question of course now becomes, will Italy become the new Greece? Are Italian debt holders destined for a write-off? I don't think so. Here's why:
Italy Is Much Stronger
Italy has one of the world's largest economies. They're a founding member of the G-8 group of industrialized nations and they have the third largest economy in the Euro zone after Germany and France. In short, while Italy is experiencing some short term troubles, they have the wherewithal to withstand a lot more hurt than the Greeks were able to withstand.
What Could Happen
The question however is what the other nations of the Euro Zone will do. Ultimately, the Italians could theoretically default on their loans, causing a domino effect which may see France defaulting as well since French banks are heavily exposed to Italian debt. This in turn could lead to even Germany having problems and ultimately the disintegration of the Euro itself.
What is Likely to Happen
For all that they like to pander to the folks back home, the Germans, the French and even the Brits and Chinese (who are both also exposed to this problem) all understand that our world is no longer able to divorce a single large economy from the whole. A smallish economy like Greece is already causing all kinds of headaches and seeing someone like Italy default would mean a domino effect which creates a global depression which would make the Great Depression look like a picnic by comparison. Therefore, I fully expect that the European Central Bank will start buying more Italian bonds in an effort to shore up the currency and prevent disaster.
Longer term, look for a restructuring of the Euro zone where stronger monetary policy integration starts to come into play. We may yet see a mini breakup in the Euro zone where someone like Greece walks away, but I expect the stronger economies, including Italy to gather together once they have the crisis under control and work out a deal to fix the Euro so this doesn't keep happening.
My Suggestion for the Somewhat Cautious (Somewhat Risky)
I'm going to cautiously suggest that those looking for good investments continue to buy Italian debt. For now, it's offering healthy returns and it's too soon to say that any investors will take a haircut on the money. However, be prepared to leave if things get too hairy and local politics begin to show a serious possibility of Euro zone breakup (though again, I'd say the chances of that happening are slim to none).
My Suggestion for Those Looking for Big Wins (Very, Very Risky)
Finally, for those with money to burn and who are willing to take a chance on an extreme long shot to make some money, I'd suggest looking into shorting the Euro with a relatively long term prospect – say around 6-12 months or so. Like I said, I think this is going to be a waste of money, but there is at least that 10% chance of the doomsday scenario where Italy really does become the next Greece and the Euro collapses under its own weight. In that unlikely event, those who made a very, very risky bet could make some good money. Though again, I wouldn't count on the bet paying off at all.