Italian bond weakest since lira as Europe crisis deepens

The Telegraph ^ | 10/30/2008 | Ambrose Evans-Pritchard

[bruinbirdman]

Investor flight from Italian bonds have pushed the yields on the country's debt to the highest level since the days of lira, raising concerns over Rome's ability to finance its budget deficit as a repayment falls due next year.

The interest spread between Italian 10-year bonds and German Bunds has reached 108 basis points, the highest since the launch of the euro. Traders say it is nearing levels that risk setting off a chain reaction.

Silvio Berlusconi insists that Italian banks are in fine health

In effect, Italy now has to pay 1.08pc more than Germany to entice pension funds and other investors to buy its state debt. It is unclear whether this is a temporary spike cause by a lack of liquidity in the bond markets, or whether it reflects concerns over the state of Italian finances.

Italy's public debt is the third largest in the world after the US and Japan. At 107pc of GDP, it is the highest of any major economy in the eurozone and almost double the 60pc limit stipulated by the EU's Maastricht treaty.

Morgan Stanley calculates that Rome needs to roll over €198bn next year as a clutch of maturities comes due. This compares with €173bn for Germany, €135bn for France, and €57bn for Spain. Four EU states have had to cancel bond auctions this month due to a buyers' strike.

"The outflows from Italian bonds have been relentless over the last year," said currency chief at Bank of New York Mellon. "It has reversed all the inflows since 2003 and the intensity does reflect significant concerns about the level of public debt."

Risk consultants Stratfor warned week that Unicredit has exposure of $130bn in central Europe and the Balkans, while Intesa has lent $50bn to the region.

[ScaniaBoy]

The spread between Italian and German bonds continued to widen yesterday:: 119.7 basis points on the 10 year bond.

But Italy is not the only country in the eurozone suffering. Look at Greece:

Investors shun Greek debt as shipping crisis deepens

Actually, it looks like the whole of the eurozone is playing Wiley Cyotee or Cartoon Economics. They are running in thin air, but as soon as they look down, we'll hear a big "oh, oh".

Europe on the brink of currency crisis meltdown

The markets are finally starting to figure out that the euro is a big confidence game. Either we will see the eurozone break up in the coming year, or the EU countries will have to form a centralized government with a common fiscal policy and giving the ECB powerof lender of last resort.

The French president Sarkozy is all for this, but will the Germans really give up all their policies?

[ScaniaBoy]

Cartoon economics

[SAJ]

A fine and accurate post, m'friend. Eurocurrency, or as I have called it since 1999, ''the Fishwrapper'', is finally getting its comeuppance as due. Sure, long way to go to the October 2000 bottom...but, as Margaret Hamilton famously noted in The Wizard of Oz, ''All in good time, my pretty, all in go-o-od time''.

Perhaps someone can revive the old ''game'' show, The Weakest Link, and invite the assorted FinMins of Wonderland (my term for the European Union) as contestants.

Might be interesting, wouldn't you think?

;^)

[bruinbirdman]

Well, there can't be a currency play lira vs. DM. But the bond spread has been a bone of contention for quite awhile, no?

What does Sarkozy want? Brussels to be able to wield the iron fist? EU must declare the Treaty/Constitution in force then.

One of our presidents went up against the Supreme Court once. The Supreme Court, of course, rules on whether laws are valid, the president enforces the laws. The president said, "How is the Supreme Court going to enforce their ruling?"

What can the EU do? Fine a bankrupt country?

yitbos

[Centurion2000]

The president said, "How is the Supreme Court going to enforce their ruling?"

US Marshals.

[ScaniaBoy]

It would be top of my viewing list.

:-)

[bruinbirdman]

" How is the Supreme Court going to enforce their ruling? 'US Marshals.' "

The United States Marshals Service (USMS) is a United States federal government law enforcement agency within the United States Department of Justice, a cabinet department.

yitbos

[bruinbirdman]

Here ya go.

Cartoon economics

yitbos

[ScaniaBoy]

Well, there can't be a currency play lira vs. DM. But the bond spread has been a bone of contention for quite awhile, no? ......... What can the EU do? Fine a bankrupt country?

Five years ago I listened to a talk by the british economist Bernard Connolly describing just this scenario.

Basically there are two solutions to a country like Italy not being able to role over its debts: Either it leaves the euro and starts to devalue its new currency - the Argentine scenario, or it stays in the Euro and will then have to take on draconian measures (like stopping social security payments) to tackle its falling economy. In a democracy that will not work. The people will vote for anyone offering another solution - like leaving the euro. So if the country wants to stay in the eurozone democracy has to be suspended.

That is of course counter to all EU laws and "constitutions" but the EU will actually support such measures. For those who don't believe me there is a historical precedent. When Belgium was trying to squeeze into the euro, democracy was suspended in all but name, and the prime minister Jan-Luc Dehaene ruled by decree.

[ScaniaBoy]

I should add that after having slowly assembled the political and administrative tools for a common EU police force, security service and military force, the EU will have in its hands powers to support a “brother in need” against his ungrateful people.

[count-your-change]

Italian Bond? What’s the guy in the picture saying? Of course!

“Bondini, Giacomo Bondini. And I like my retsina neither shaken nor stirred”

[bruinbirdman]

"the EU will have in its hands powers to support a “brother in need” against his ungrateful people."

Deutschland is getting fed up.

I see their unemployment rate just went down.

Sweden can't bail out the Baltic states forever.

yitbos

[Claud]

I know nothing about economics, and I may be displaying my ignorance here, but how do we have all these countries in the world “selling debt”?

I can see natural products, exports, minerals, stuff like that. But debt? It all seems....I dunno...fake.

[pierrem15]

The markets are finally starting to figure out that the euro is a big confidence game. Either we will see the eurozone break up in the coming year, or the EU countries will have to form a centralized government with a common fiscal policy and giving the ECB powerof lender of last resort.

What the markets have figured out is that when push comes to shove, the German government will NOT honor Euro-denominated debt held by other EU states, making those Euro denominated loans worth only what the credit rating of those other individual states warrants.

If those other states (Greece, Italy, Spain) lose the ability to borrow in Euros, they will have to revert to their own currencies, which will (temporarily) break the common market in Europe as those new currencies sink tremendously against the "Euro-Mark".

[ScaniaBoy]

Yes, you are correct, and that's what I meant. The only thing we may not agree on is the fallout of a situation where the ClubMed countries (and maybe Ireland , Belgium and even Austria) will have to revert to their own currencies to avoid state bankruptcies. .

That would not be a temporary situation, but would mean the end of the Euro. In such a situation a German government could make its citizen very happy by leaving the Euro and changing to the (new-) D-Mark.

[ScaniaBoy]

WSJ who used to have a blind spot where it came to the EU/EMU has also noted that something is amiss:

Investors Raise Their Bets on Defaults in EU Countries

Investors are upping their bets that as the $12.2 trillion euro-zone economy heads into recession, costly bank-bailout plans could drive some European governments to default on their debt.

[pierrem15]

What about France? I suspect the Germans wouldn't be very happy in the end when the internal EU demand for German products fell precipitously as the new D-mark skyrocketed against the new currencies.

They would wind up eating the debt anyway as their customers went under.

[ScaniaBoy]

France and Germany or rather French and German politics and public sentiments are real anomalies. One would think that Germany, since it is a leading export nation would like its currency to remain relatively weak. But, no the Germans won't have any of that. The memories of the inflations (note plural) that wiped away lifetime savings remains with both the Germans who lived through those periods (the 1920’s super-inflation, and the Lucky Strike inflation post-WW II) and their descendants. That's why Germany always have argued for rules that would keep the Euro a hard currency.

France has never been able to compete on German terms; another export nation, but it has retained a large or at least very influential agricultural sector. However, based almost purely on political motives the French have tried to first create a hard Franc, and then the lure the Germans into the Euro. That was part of the deal made between Kohl and Mitterrand for the German unification.

The French have gone along with the Germans building a pan-European (or rather a pan-EU) Bundesbank, free from political influence. However, at the same time France's long term plan has been to eventually take over the bank and make it run by the politicians. France has always known how to bend political agreements to its will. (Sarkozy has been surprisingly open ever since his election that this is one of his primary political goals.)

So, if the present political turmoil really turns into a big currency crisis in the eurozone, the French certainly are going to do their utmost to create a political solution that would keep the defaulting countries within the Euro. The German government may go along to a certain degree, but since it will be the Germans who will have to foot the bill, the € 1 000 000 question is for how long will the Germans act contrary to their own interests?