Italy Back In Focus

Italy had a 12 month bill auction on Wednesday to be followed by a €4.5 billion  long term bond auction on Thursday and an even bigger €9.5 billion auction on Friday for a total of nearly €20 billion in debt sales this week. The timing of these auctions seems rather unfortunate. 

As Bloomberg reports:


„Italian yields on 12-month bonds skyrocketed to near December levels, wiping out the benefits of Premier Mario Monti's nearly seven-month government as Spanish contagion spreads.

Italy paid 3.972 percent interest rates — up from 2.34 percent last month — to sell (EURO)6.5 billion ($8.12 billion) in 12-month paper. The bond auction enjoyed strong demand.“


Below is the action in 2 year and 10 year yields over the first three trading days of this week (i.e., the 'post Spain banking bailout announcement period') as well as their longer term performance. Directionally, Spanish and Italian yields remain strongly correlated, but obviously the market currently views Italian debt as the slightly safer bet, as yields remain well below their November 2011 panic highs.  Still, it was a wild and woolly week, with the yield curve once again flattening, as it usually does during panic phases:








Italy's 2 year yield, Monday – Wednesday. Almost a 100 basis points move from low to high in three trading days is rather remarkable – click chart for better resolution.



Italy's 2 year note yield over the past three years. Currently yields remain well beneath their panic highs of last year, but obviously the current level is disturbingly high nonetheless – click chart for better resolution.



Italy's 10 year yield, Monday – Wednesday: a comparatively much smaller move, i.e. The yield curve is flattening again. At 6.25% the 10 year yield is uncomfortably high as well – click chart for better resolution.



Italy's 10 year yield over the past three years – click chart for better resolution.



As German news magazine Der Spiegel reports, prime minister Monti has spent most of this week denying that Italy will require a bailout as well:


“Italian Prime Minister Mario Monti has denied that his country will ask for an EU-led bailout. He told the German broadcaster Deutschlandradio Kultur on Wednesday that he realized Italy had a reputation as a "cheerful and undisciplined" country, but that it was "more disciplined" than many other European countries — adding that it was "also not so cheerful.”


Unfortunately the Italian economy is in a downward spiral – for instance, industrial production has declined by nearly 25% since 2008. Unemployment is at 10%, youth unemployment at 36%. To be sure, these data still look a great deal better than comparable data in the other stricken members of the 'PIIGS' club.

Meanwhile, support for Mario Monti – who started out with an approval rating of 71%, no doubt because Italians had had enough of Silvio Berlusconi's antics – is dwindling quite a bit lately. The harshness of the austerity program, and especially the tactics employed by the revenue service to battle tax evasion have made him few friends.

The WSJ reports that he 'faces a crucial test' now:


“Prime Minister Mario Monti's honeymoon is over.

Italy's return to the cross hairs of the euro-zone debt crisis has ratcheted up pressure on Mr. Monti to accelerate his turnaround of the country's moribund economy. But the effort is running up against a rising tide of discontent at home.

Mr. Monti has passed austerity measures including tax increases and an overhaul of Italy's pension system since taking office in November, garnering widespread praise from investors and world leaders.

In recent days, however, the aura surrounding Mr. Monti has faded as investors and lawmakers at home take a hard look at unfinished items on the agenda—an overhaul of the labor market, cuts to government spending and plans to modernize the justice system.

"The Monti effect has waned considerably," said Nicholas Spiro, who heads a London-based consultancy on sovereign debt.

Whether Mr. Monti regains his previous momentum is one of the most important questions facing Europe. Because of the size of its economy and debt—€1.9 trillion ($2.39 trillion), equivalent to 120% of its gross domestic product—Italy would be too big for Europe to bail out.

In a bid to shore up support for his government, Mr. Monti summoned the heads of Italy's biggest political parties to a meeting late Tuesday, reminding party leaders that their backing was crucial for Italy to "overcome the critical nature of the current situation and project an image of cohesion abroad," according to a statement from the government.

Investor fear that Italy could require outside help—compounded by anxiety over Spain and continuing uncertainty over Greece—is driving Italy's borrowing costs back to the levels that preceded Mr. Monti's appointment. On Tuesday, the yield on Italy's 10-year bond reached 6.14%, compared with a 1.42% yield on ultrasafe German bunds. Rome still needs to sell about half of the €450 billion in debt that Italy needs to roll over this year, said a Treasury official.

At the same time, Mr. Monti's tax-heavy austerity measures have choked economic growth, causing Italy's economy to contract 0.8% in the first four months of the year.”


(emphasis added)

We have strongly criticized Monti's reliance on raising taxes as opposed to cutting spending when his austerity package was first announced. The man is a typical bureaucrat – it is against his instinct to cut the size of government and he has no idea what struggles businessmen are facing daily.  

In spite of his timidity with regards to making government smaller, it seems the bureaucracy is actually arrayed against him now – and with it, increasingly the political establishment as well. His labor market reform bill is floundering:


“A poll last week found that only half of Italians supported political parties that form Mr. Monti's parliamentary majority, down from 63% two months ago. Confidence in Mr. Monti among those surveyed fell to 34%, compared with 71% when Mr. Monti took office.

The steady erosion of public support for Mr. Monti's government is also prompting some politicians to question whether Mr. Monti can still push through the tough changes demanded by EU leaders.

Last week, Stefano Fassina—head of economic affairs for the left-leaning Democratic Party—said Mr. Monti lacked "the force to forge ahead with other reforms" and questioned whether Italy should hold elections in the fall instead of spring 2013 as planned.

Meanwhile, the country's sprawling bureaucracy of civil servants and functionaries are publicly butting heads with ministers who are supposed to rein in their budgets. The longer political parties maintain their backing for Mr. Monti, the more votes they risk losing when Italians eventually go the polls, said Alessandro Campi, a professor of politics at the University of Perugia. "We're in a situation of pure chaos," Mr. Campi said. "No party wants to get blamed for supporting a government that didn't get big results."

Mr. Monti's drive to overhaul the labor system has made progress. A bill that aims to make it easier for Italian firms to hire and fire workers has passed the Senate, the upper house of the Italian Parliament. However, Mr. Monti had to water down the measure, removing a provision that would have allowed companies to cut workers without having to go before a judge. The bill still faces weeks of scrutiny and possible modification in the Camera, the lower house of Parliament, before it faces a final vote.”


(emphasis added)

One can not 'fire workers without facing a judge'? This is like a surreal dream. Although as we have pointed out previously, Italy is in far better condition overall than many other debtor countries in the euro area due to its high private sector savings, there is still a good chance that the crisis won't stop short of engulfing it. Obviously that is a threshold that must not be crossed – as the WSJ wrote, it really is 'too big to bail'.



Monti's program is in trouble and so is he.

(Photo via



Meanwhile, the sour social mood is reflected in Italy's stock market, which keeps going lower:



The MIB is not far off its recent lows – click chart for better resolution.



The biggest culprits are once again bank stocks, with Unicredito only a smidgen above its all time low made last year:



Unicredito keeps falling after a brief recovery earlier this year – click chart for better resolution.



As Italian banks have loaded up on Italian government bonds following the ECB's LTRO, the recent bond market rout has been rather bad news for them. If Italy's sovereign debt crisis deepens, a concomitant banking crisis will be unavoidable.


Spain Hit by More Downgrades

Late on Wednesday afternoon, Moody's issued another downgrade of Spain in light of the bank bailout. As Moody's notes, Spain's government is liable for the bailout, which in turn means its sovereign credit rating deserves to be cut further. Of course all of this should already have been crystal clear well before the recently announced bank bailout, but as we often point out, these downgrades do have an effect even though they are usually behind the curve. 

As the rating has been slashed by three notches, Spain is now only a single step above 'junk'. Moreover, the rating may be cut again in three months time, depending on developments until then. Among the factors Moody's intends to weigh: the outcome of the Greek election. 


“Credit ratings agency Moody's Investors Service cut its rating on Spanish government debt on Wednesday by three notches to Baa3 from A3, saying the newly approved euro zone plan to help Spain's banks will increase the country's debt burden.

Moody's, which also said it could lower Spain's rating further, cited the Spanish government's "very limited" access to international debt markets and the weakness of the national economy.

The rating is on review for possible further downgrades, which could come within the next three months, Moody's said.

"We will of course also take into account whatever the details are that come out on the size and the terms of the (bank) support package, and also take into account what's going on in the wider euro zone" in weighing further downgrades, said Kathrin Muehlbronner, a Moody's analyst in London.

That includes both Sunday's election in Greece and an upcoming European summit at the end of the month, she said.”


Moody's now puts Spain's rating one notch above junk status. Standard & Poor's rates Spain two notches higher at BBB-plus with a negative outlook. Fitch Ratings cut Spain's rating by three notches on June 7 to BBB – one notch above Moody's – and put a negative outlook on the credit


(emphasis added)

We will see how Spain's bond market reacts to this on Thursday morning – in Wednesday's trading it barely budged, remaining stuck near the recent high in yields. Incidentally, Moody's also downgraded Cyprus in the same breath and reportedly plans to further downgrade up to 75 Spanish banks.

Independent rating agency Egan-Jones meanwhile predicted that both Spain and Italy will 'require full scale bailouts within six months'.

Spain's economy is of course also extremely weak, so the probability that the mooted bank bailout of €100 billion will prove not to be enough is quite high. In fact, such bailouts always tend to grow beyond the initially mooted amount.



Spain's retail sales: down sharply from their peak – click chart for better resolution.



Spain's 10-year yield consolidated near its recent high on Wednesday – this was prior to the latest slew of downgrades – click chart for better resolution.



Greek Bank Run Makes News Again

We mentioned the intensifying bank run in Greece already a few days ago, but Reuters and the WSJ got into the act on Wednesday as well. It appears that a late day sell-off in the stock market was triggered, or at least helped along by these reports. According to the WSJ, withdrawals are running at about €600 million to €900 million per day of late. These are enormous amounts for a small country like Greece and given the de facto insolvency of its banks this also means that ELA financing will likely continue to grow.


“Withdrawals by customers at Greek banks have been rising before Sunday’s elections, two banking sources said Wednesday.

“There has been a deterioration in the situation in the past few days; I estimate that between 600 million euros [$750 million] and 900 million euros have been leaving the system per day,” said a senior banker at one of Greece’s leading lenders.

“As we approach the last few days before the elections I expect deposit withdrawals to rise further,” he added. “And I wouldn’t be surprised if by Friday we saw outflows of 1 billion to 1.5 billion euros.”

But he added that the sums remains “manageable” since the banks keep large cash buffers on hand to deal with the withdrawals.”


(emphasis added)

We have previously commented on the incongruity of electing SYRIZA and concurrently fearing for one's savings, but it is of course quite likely that the bulk of the voters that cast their vote for the Radical Left have in fact not much to lose at this point. The others probably are not very eager to wait for this to happen:



The Postscheckamt in Berlin 1931,  shortly after the bankruptcy of Austria's Creditanstalt.

(Image credit: Wikimedia Commons)



Meanwhile, our speculation that Francois Hollande would prove a good soldier in the eurocracy's cause – apart from his own spending habits at home of course – has received a first confirmation as he was wheeled out to comment on the upcoming Greek election. He pontificated on 'Greece's commitments' a bit and warned that Greece might be pushed out of the euro if things don't go to the eurocracy's liking (obviously they couldn't task Mrs. Merkel with making such pronouncements at this juncture):


“French President Francois Hollande Wednesday warned Greeks four days before elections that if Athens does not keep its bailout commitments, some of its eurozone partners will want it out of the bloc.

While acknowledging the Greeks' right to determine their own future, Hollande told Greek Mega Channel television that if it appears from the vote that they doesn't want to respect the bailout deal "there will be countries in the eurozone which would prefer to end Greece's presence in the eurozone."

Greece holds its second parliamentary election in six weeks this Sunday, after a May vote failed to produce any workable majority. The leftist Syriza party, which has pledged to tear up the bailout deal, stands a good chance of winning, and even parties which backed the rescue now favour renegotiating its terms.

"I am in favour of Greece remaining in the eurozone, but Greeks should know that this requires there be a relationship of trust," Hollande said in a transcript of the interview provided by his office. Hollande said he had lobbied his EU counterparts for bloc funds be speeded up so Greece, now in its fifth year of recession, can return to growth.

He pledged he would continue to push for their release and warned Greeks "the abandoning pure and simple of the (bailout and austerity) memorandum would be seen by many eurozone members as a break up."

Hollande, who has pushed for the eurozone to shift its focus from austerity to growth, said the situation has now evolved even further.

"The financial situation is such that we must also have guarantees so banks can be preserved and supported," said the French president. "We are already in another stage," of the eurozone crisis. "This is what the Greeks must also understand," he added.


(emphasis added)

Stick, then carrot, then stick again….emphasizing how it's not his fault, he's merely the reluctant bearer of bad news, and then he leaves them with: “you know, you're actually not so high up on the list of priorities anymore”.

The entire spiel can be summarized in a single sentence: “Better don't vote for SYRIZA”. It may also have been addressed to would-be miracle producer Alexis Tsipras himself, who continues to promise his voters that they can have their cake and eat it it too.

Concurrently to this slightly surprising intercession by Hollande, there were carefully placed leaks that the euro-group is considering giving the Greek austerity program a little bit more rope, even if New Democracy should win the election (see also this report in 'Der Spiegel'):


“The euro zone wants to negotiate a loosening of the terms of Greece's fiscal consolidation program, German newspaper Financial Times Deutschland reports Wednesday.

Any new Greek government will demand changes to the country's savings program, regardless of the outcome of Sunday's general elections, the newspaper reports, citing people close to the matter.

If other member states want Greece to remain in the euro zone, they won't be able to refuse such negotiations, FTD reports.

The Troika–comprising the European Commission, European Central Bank and International Monetary Fund–is proceeding on the assumption that Greece has already violated the terms of its reform plan, the newspaper reports, citing people close to the matter. The Troika will confirm at its next visit to Greece that the reform program hasn't been fulfilled, German Finance Minister Wolfgang Schaeuble told politicians at a meeting of his party's parliamentary group, FTD reports.

But the Troika is still officially calling on Greece to meet all its reform pledges. "We expect the Greeks to fulfill all agreed commitments," a spokesman for the European Commission told FTD.”


One has to admire the perfect timing and choreography of this eurocratic propaganda exercise on Wednesday.  Tomorrow a big German newspaper is going to report on the need for a 'third aid package for Greece' to boot.



SYRIZA leader Alexis Tsipras: “I will give you everything…”

(Photo credit:  Kostas Tsironis/Bloomberg)



In the meantime, people are speculating how exactly the exit of Greece will play out in the event of a SYRIZA win. Will it be quietly run out by cutting off ELA? Will there be some other method? Or will extend & pretend somehow continue anyway, just like Tsipras says?  Perhaps we need a quantum theory of Greece: there will be one universe where it remains in the euro area, and one where it leaves, both existing side by side. One would have to remove oneself from Greece's event horizon of course, maybe move to a cabin in the woods that has no TV and no telecommunication facilities. Quantum coherence can then be established at some later point in time by coming out of the woods again and picking up a newspaper.


Addendum 1: Grilling Jamie

We must actually agree with JPM CEO Jamie Dimon that it is slightly mysterious why there is so much attention lavished on JPM's recent trading loss. Trading is risky, so what's the big deal? $2 billion (or however much it will turn out to be) is a lot of money, but not enough to seriously endanger JPM. Anyway, today we came across a funny picture showing the Senate's Banking committee and how much money each of the scoundrels manning it has gotten in form of bribes from the financial industry. Sorry, we meant to say 'political contributions' of course.



The Senate Banking committee members and their 'take' from the financial industry. Whoa!

(Image credit: New York Post)



Addendum 2: Cyprus – Another Loan from Russia?

Apparently Cyprus is trying to get another € 5billion loan from Russia. As one of our readers pointed out, Cyprus is an important money laundering facility for a number of Russians, and as such worth preserving. This seems to have been going on for decades:

“Mr. Christofias is believed to favor a bilateral loan from Russia, with which Cyprus has had a close relationship for decades. Cyprus's favorable tax regime has drawn a flood of Russian money, and the island nation was the largest recipient of Russian foreign direct investment in 2011. The country's Russian-speaking population numbers close to 40,000, and the amount of Russian cash on deposits in Cyprus's banks and real estate sector has been estimated between €10 billion and €20 billion.”


(emphasis added).  




Charts by: Bloomberg,


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