It Was Never Destined to Work …

The markets have given Italy's debt the benefit of the doubt based on the ECB's OMT promise, but the basic problem still awaits resolution. In the past, Italy would have simply devalued the lira, confiscating its citizenry's vast savings with the hidden inflation tax and devaluing the government's outstanding debt. This time it had to implement 'reform', but the man chosen to do that was a typical EU approved bureaucrat, someone who knows absolutely nothing about the daily struggle producers of wealth face in the marketplace. And so Mr. Monti did what a statist bureaucrat is wont to do: he raised a plethora of taxes, severely restricted the use of cash and ordered the tax bureau to go on a hugely repressive hunt for all sorts of perceived tax cheats, down to the pensioners who help with olive tree maintenance to supplement their meager incomes in order not to starve. The openly declared goal of these activities was to intimidate the citizenry. We're not just making this up – this is what they said they wanted to achieve, even if their actions were to weigh on the economy. We have detailed some of the methods employed in a past write-up.

 

As Italy's tax payer association remarked last year: “Monti's reform has consisted of introducing new taxes and nothing else”.

Not surprisingly, the underlying problems therefore remain firmly in place. The government's outstanding stock of debt has continued to rise (at a rate of almost €75 billion per year), the economy has tanked and the citizenry has been terrorized. Good job.

Now the bond market's equanimity can apparently no longer be counted on, although this is of course currently not a matter confined to Italy –  bond yields have been surging worldwide. The problem for Italy is that if bond yields continue to rise, unstoppable debt spiral dynamics will reassert themselves. Moreover, the banking system will be in even bigger trouble than it already is, as the banks are up to their eyebrows in Italian government bonds.

 


 

Italy-10 yr. yield


Italy's 10 year government bond yield: once again approaching the 5% level

 


 

Solvency Risk on Yellow Alert

Mediobanca has constructed a 'solvency risk' indicator that is lately giving alarm signals. This is an ominous development, especially as the governing coalition is under strain. According to a recent Telegraph report, Italy may require a rescue within six months unless a miracle happens. It looks like Super-Mario's OMT promises will be tested after all:

 

“Mediobanca, Italy’s second biggest bank, said its “index of solvency risk” for Italy was already flashing warning signs as the worldwide bond rout continued into a second week, pushing up borrowing costs.

“Time is running out fast,” said Mediobanca’s top analyst, Antonio Guglielmi, in a confidential client note. “The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now in special crisis administration.”

The report warned that Italy will “inevitably end up in an EU bail-out request” over the next six months, unless it can count on low borrowing costs and a broader recovery.

Emphasising the gravity of the situation, it compared the crisis with when the country was blown out of the Exchange Rate Mechanism in 1992 despite drastic austerity measures. Italy’s €2.1 trillion (£1.8 trillion) debt is the world’s third largest after the US and Japan. Any serious stress in its debt markets threatens to reignite the eurozone crisis. This may already have begun after the US Federal Reserve signaled last week that it will begin to drain dollar liquidity from the global system.”

[…]

Sovereign debt strategist Nicolas Spiro said “taper terror” is jolting eurozone investors out of their complacency, though safe-haven Swiss and German bonds have also sold off sharply in the rout. Yields on 10-year UK Gilts closed at a two-year high of 2.53pc.

Yields punched to 5.1pc in Spain, and 6.7pc in Portugal. This is sending a secondary shock wave through their corporate debt markets, choking recovery.

“The European Central Bank needs to take very aggressive steps to offset this,” said Marchel Alexandrovich from Jefferies Fixed Income. “We have a sell-off across the board. If the ECB doesn’t act, it could see all the gains of the past nine months vanish in two weeks, taking the eurozone back to square one.”

[…]

Borrowing costs of 5pc could prove crippling for Spain and Italy, both suffering from contraction of nominal GDP.

Mediobanca said the trigger for a blow-up in Italy could be a bail-out crisis for Slovenia or an ugly turn of events in Argentina, which has close links to Italian business. “Argentina in particular worries us, as a new default seems likely.”

 

(Emphasis added)

So the cries for more central bank intervention are already going up – no surprise there.  We found the tidbit about Argentina potentially becoming a trigger for a crisis in Italy interesting – we were unaware of the strong economic ties mentioned by Mediobanca.

 

Shady Derivatives Deals Helped to Hide Debt

In the meantime it has also turned out that just like Greece, Italy used complex derivatives deals to lie about the size of its debt prior to its accession to the euro (readers may recall that we have mentioned in the past that all governments lied about their debt in some shape or form at the time –  now it is finally officially admitted, bit by bit). While this has a surprise coefficient of exactly zero, the admission means that there will likely be an immediate hit to the budget, to the tune of about 8 billion euro. And guess who was one of the Italian officials deeply involved at the time with the country's debt and deficit accounting?  The man who presumably helped with cooking up this scheme? It was none other a certain rather well-known Goldman Sachs alumnus who currently runs the ECB (this was shortly before he joined GS by the way).

 

“Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the euro zone crisis, according to a confidential report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999.

A 29-page report by the Treasury, obtained by the Financial Times, details Italy's debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7 billion.

While the report leaves out crucial details and appears intended not to give a full picture of Italy's potential losses, experts who examined it told the Financial Times the restructuring allowed the cash-strapped Treasury to stagger payments owed to foreign banks over a longer period but, in some cases, at more disadvantageous terms for Italy.

The report does not name the banks or give details of the original contracts – questions that worried the state auditors – but the experts said they appeared to date back to the period in the late 1990s. At that time, before and just after Italy entered the euro, Rome was flattering its accounts by taking upfront payments from banks in order to meet the deficit targets set by the EU for joining the first wave of 11 countries that adopted the euro in 1999.

Italy had a budget deficit of 7.7 percent in 1995. By 1998, the crucial year for approval of its euro membership, this had been reduced to 2.7 percent, by far the largest drop among the Euro 11.”

[…]

Mario Draghi, now head of the European Central Bank, was director-general of the Italian Treasury at the time, working with Vincenzo La Via, then head of the debt department, and Ms Cannata, then a senior official involved with debt and deficit accounting.”

 

(emphasis added)

It is quite ironic that Mario Draghi may now well end up as the person imposing 'conditionality' (read: severe austerity measures) on Italy when its government finally comes to the ECB, hat in hand. As an aside, the € 8 billion figure is an estimate, as Italy of course does not fully disclose the extent of its derivatives losses. The ECB is rather tight-lipped about the involvement of its boss as well:

“An ECB spokesman declined to comment on the bank's knowledge of Italy's potential exposure to derivatives losses or on Mr Draghi's role in approving derivatives contracts in the 1990s before he joined Goldman Sachs International in 2002.”

 

Again, surprise factor zero. Very likely it will all be swept under the rug. The main thing is to keep the Italian population properly terrorized after all, not going after those who are actually responsible for the mess the country is in.

 

Wobbly Government

Lastly, there has been a surprising spike in successful prosecutions of former prime minister Berlusconi in the meantime. He was just convicted for the  third time in a row, this time of allegedly 'paying a minor for sex'.

Berlusconi himself of course maintains that what is going on is a political witch hunt. It is probably true that he has done all sorts of legally dubious things in the course of his career – how else would he ever have become prime minister of Italy as well as a billionaire media mogul in a high tax regulatory democracy? No-one who actually hews 100% to the rules and regulations of the modern-day 'free' economic tyrannies can ever hope to accumulate such a huge amount of capital. However, that means that Berlusconi is probably no worse than  others in similar positions. In that sense he is probably correct: if not for the fact that powerful forces within the EU want to get rid of him, he simply wouldn't be successfully prosecuted. Note that Berlusconi wants to roll back the worst excesses of Monti's so-called 'reforms'. He is therefore seen as a danger to the EU centralization project – a thorn in the side of the socialist super-state. Here are two brief quotes from the Bloomberg article on the conviction:

 

“The verdict “confirms the intention to eliminate Prime Minister Berlusconi from the political scene,” Paolo Bonaiuti, a senator and spokesman for Berlusconi, said in an e-mailed statement.

[…]

Berlusconi’s trials may pose a greater threat to his political career than to his freedom, given Italy’s flexible sentencing and indulgence toward convicts over the age of 70.”

 

(emphasis added)

Regardless though of the motives and the question of Berlusconi's guilt or innocence, the immediate effect will be that the coalition government will find it harder to introduce new reform measures. Prime minister Letta's latest plans require the support of Berlusconi's party.  As one observer remarked:

 

“Letta’s going to have to fight very hard to keep his boat on course,” said James Walston, a professor at the American University in Rome. The verdict “makes the Berlusconi supporters all the more hyped up and angry, and they’re going to be a lot tougher on completely irrelevant issues.”

 

One bone of contention is Letta's plan to increase VAT, which Berlusconi opposes. It is conceivable, although most observers don't think it is likely at the moment, that the coalition will split up again. In that case, new elections will have to be held.

Meanwhile, the Milan Stock Index (MIB) looks quite wobbly as well of late:

 


 

MIB


The MIB index in Milan – back to 52 week lows and testing an important level of support in the process.

 


 

Conclusion:

Italy may soon be making its way back to page 1 from page 16. It remains the euro area's most worrisome problem, given the huge size of its outstanding debt (Italy's government debt stock is the third largest in the world). A renewed flaring up of the crisis with a focus on Italy is the  eurocracy's worst nightmare. It is a good bet that if it happens, it will happen at an extremely inopportune moment. Right now everybody is hoping and praying that nothing untoward occurs prior to Germany's election – but no-one knows if the markets will comply with such wishes. If the recent massacre in international bond markets continues, there will be nothing that can be done to keep the Italian debt problem from resurfacing with a vengeance.

 
 

 

Charts by: BigCharts


 

 
 

 
 

Dear Readers!

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

   
 

2 Responses to “Clouds Gather Over Italy”

  • Crysangle:

    Calm down rodders !

    I think just about everyone here understands your sentiment , but I get the sensation who you are referring to is very twisted and probably enjoys any reaction .

    Note Brasil is to Spain similar to what Argentina is to Italy . A large part of profits from main banks (esp. Santander) and other large business in Spain are being written down due to x-rates , economic slowdown in the country , and some new legislation . Not small sums either – Spanish businesses in Brasil makes up to a quarter of profits there in some cases .

  • rodney:

    What? This is not supposed to happen. Don’t you know, the ECB is the best central bank in the world and the Euro is the Best Currency Ever!!! And I love everything about Draghi!!!

    Of course our jackass friend did not want to comment this time. Hey, listen up dude, you are deluded and it will break apart right before your very eyes.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • 21st Century Shoe-Shine Boys
      Anecdotal Flags are Waved   "If a shoeshine boy can predict where this market is going to go, then it's no place for a man with a lot of money to lose." - Joseph Kennedy   It is actually a true story as far as we know – Joseph Kennedy, by all accounts an extremely shrewd businessman and investor (despite the fact that he had graduated in economics*), really did get his shoes shined on Wall Street one fine morning, and the shoe-shine boy, one Pat Bologna, asked him if...
  • Christopher Columbus and the Falsification of History
      Crazed Decision The Los Angeles City Council’s recent, crazed decision* to replace Christopher Columbus Day with one celebrating “indigenous peoples” can be traced to the falsification of history and denigration of European man which began in earnest in the 1960s throughout the educational establishment (from grade school through the universities), book publishing, and the print and electronic media.   Christopher Columbus at the Court of the Catholic Monarchs (a...
  • India: The Genie of Lawlessness is out of the Bottle
      Recapitulation (Part XVI, the Last) Since the announcement of demonetization of Indian currency on 8th November 2016, I have written a large number of articles. The issue is not so much that the Indian Prime Minister, Narendra Modi, is a tyrant and extremely simplistic in his thinking (which he is), or that demonetization and the new sales tax system were horribly ill-conceived (which they were). Time erases all tyrants from the map, and eventually from people’s...
  • The Forking Paradise - Precious Metals Supply and Demand Report
      Forking Incentives A month ago, we wrote about the bitcoin fork. We described the fork:   Picture a bank, the old-fashioned kind. Call it Acme (sorry, we watched too much Coyote and Road Runner growing up). A group of disgruntled employees leave. They take a copy of the book of accounts. They set up a new bank across the street, Wile E Bank. To win customers, they say if you had an account at Acme Bank, you now have an account at Wile, with the same balance!   BCH, son...
  • The Government Debt Paradox: Pick Your Poison
      Lasting Debt “Rule one: Never allow a crisis to go to waste,” said President Obama’s Chief of Staff Rahm Emanuel in November of 2008.  “They are opportunities to do big things.”   Rahm Emanuel looks happy. He should be – he is the mayor of Chicago, which is best described as crisis incarnate. Or maybe the proper term is perma-crisis? Anyway, it undoubtedly looks like a giant opportunity from his perspective, a gift that keeps on giving, so to speak. [PT] Photo...
  • The United States of Hubris
      Improving the World, One Death at a Time If anyone should have any questions about whether the United States of America is not the most aggressive, warlike, and terrorist nation on the face of the earth, its latest proposed action against the supposed rogue state of North Korea should allay any such doubts.   Throughout history, the problem with empires has always been the same: no matter how stable and invincible they appeared, eventually they ran into “imperial...
  • Long Term Statistics on AAPL
      Introductory Remarks by PT Below we present a recent article by the Mole discussing a number of technical statistics on the behavior of AAPL over time. Since the company has the largest market cap in the US stock market (~ USD 850 billion – a valuation that exceeds that of entire industries), it is the biggest component of capitalization-weighted big cap indexes and the ETFs based on them. It is also a component of the price-weighted DJIA. It is fair to say that the performance of...
  • Tragedy of the Speculations
      The Instability Problem Bitcoin is often promoted as the antidote to the madness of fiat irredeemable currencies. It is also promoted as their replacement. Bitcoin is promoted not only as money, but the future money, and our monetary future. In fact, it is not.   A tragedy... get the hankies out! :) [PT]   Why not? To answer, let us start with a look at the incentives offered by bitcoin. We saw a comment this week, which is apropos:   "Crypto is so...
  • To Hell In A Bucket
      No-one Cares... “No one really cares about the U.S. federal debt,” remarked a colleague and Economic Prism reader earlier in the week.  “You keep writing about it as if anyone gives a lick.” We could tell he was just warming up.  So, we settled back into our chair and made ourselves comfortable.   The federal debtberg, which no-one cares about (yet). We have added the most recent bar manually, as the charts published by the Fed will only be updated at the end of the...
  • Despite 24/7 Trading: Bitcoin Investors are Taking off for the Weekend on Friday Already
      Crypto-Statistics In the last issue of Seasonal Insights I have discussed how the S&P 500 Index performs on individual days of the week. In this issue I will show an analysis of the average cumulative annual returns of bitcoin on individual days of the week.   Bitcoin, daily. While this is beside the point, we note the crypto-currency (and other “alt coins” as well) has minor performance issues lately. The white line indicates important lateral support, but this looks to...
  • Precious Metals Supply and Demand
      Fundamental Developments There were big moves in the metals markets this week. The price of gold was up an additional $21 and that of silver $0.30. Will the dollar fall further?As always, we are interested in the fundamentals of supply and demand as measured by the basis. But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.   Gold and silver prices in USD terms (as of last week Friday) - click to enlarge.   Next, this is a...
  • Precious Metals Supply and Demand
      Back to the Happy Place Amid a Falling Dollar The prices of the metals dropped this week, $24 and $0.38. This could be because the asset markets have returned to their happy, happy place where every day the stock market ticks up relentlessly.   Sometimes, happiness is fleeting... - click to enlarge.   The major currencies have been rising all year—we insist that this is a rise in these dollar derivatives, not a fall in the dollar—and this is a risk-on pattern....

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com