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.
„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.”
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.”
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 metronet.it)
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
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 ''.
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.”
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.
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, 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.”
Charts by: Bloomberg, BigCharts.com
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
One Response to “Euro Area – A Well-Choreographed Circling of the Drain”
Most read in the last 20 days:
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- US Financial Markets – Alarm Bells are Ringing
A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...