Josh Brown: Italy too big not to be bailed out

Marketplace Staff Nov 9, 2011

Josh Brown: Italy too big not to be bailed out

Marketplace Staff Nov 9, 2011

Jeremy Hobson: Now let’s get to the big story today which is Italy: the interest rate on 10 year bonds — the yield, as it’s called — has gone north of 7 percent this morning.

That means it’s more expensive for Italy to borrow money. And the other countries in Europe that have passed that crucial 7 percent mark have needed to be bailed out.

For more on this, let’s bring in our regular Wednesday guest Josh Brown, of Fusion Analytics who is with me live in the studio here in New York. Good morning.

Josh Brown: Buon giorno.

Hobson: Buon giorno, Josh. Well, let me first I ask you to listen to what Christine Lagarde, the head of the International Monetary Fund, said today in China.

Christine Lagarde: We believe that the world economy has entered a dangerous and uncertain phase.

Hobson: “Has entered a dangerous and uncertain phase.” Is that your view from here in New York?”

Brown: That phrase sounds even scarier in her voice. My view from here in New York is that we’ve been in a dangerous, uncertain phase. Italy isn’t the first country to go down this road, so it’s just the latest and it happens to be the biggest.

Hobson: But isn’t there a concern that if this problem gets this bad in Italy, that it’s going to now spread to even more European countries — even maybe France?

Brown: Without a doubt — that’s been the big fear since day one. Contagion is one of the scariest parts of this because when you look at the French banks, when you look at the German banks, they’ve all got Italian bonds on their books.

And that is what we’ve all been concerned about since day one. It’s one of the key comparisons with what we went through with Lehman Brothers a couple years ago. In fact, we’re calling this Italian mess “Lehman-cello.”

Hobson: Are banks here in this country at risk if this banking crisis in Europe gets worse because of the bonds that they’ve got on the European banks?

Brown: Jeremy, here’s the good news: U.S. banks have been well aware of this potential crisis for years. They’ve been factoring it in, they’ve been shedding exposure as fast as possible, they’ve been holding special conference calls to lay out the details to show just how unlevered they are to this Italian or Spanish or any kind of euro sovereign debt problem.

So, it’s not that they’ll be completely unaffected, it’s that we’re not talking about a domino situation; it’s simply not that bad.

Hobson: Do you think Italy is too big to be bailed out by the rest of Europe?

Brown: No, Italy actually has to be bailed out — it’s too big to not be bailed out. You asked the question back, “what’s different between Italy and Greece?” With Greece, politicians would make off-the-cuff remarks like Greece might have to leave, with Italy there’s no such thing, it’s not a possibility.

Hobson: Josh Brown of Fusion Analytics, thanks so much.

Brown: Thank you.

Josh Brown is a New York City-based financial adviser at Fusion Analytics. He helps people invest and manage portfolios for them. Josh’s clients range from individuals to corporations to retirement plans to charitable foundations. He is also the author of The Reformed Broker, one of the top 10 financial blogs in the United States.

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