July 10, 2011
Italy's Monday Madness
Greece and Portugal are no longer a problem if next week the market will keep shooting on the Italian treasury bonds and if a clear sign from both Rome and Frankfurt will not be passed to the bond vigilantes.
Few days more like Friday and we are facing potentially a Lehman collapse multiplied 10+ times.
That this situation is getting out of control is demonstrated by today's pre-emptive declarations in view of tomorrow's Black Monday on the european markets.
The first pre-emptive strike came today from the EU summoning an emergency meeting tomorrow on the Italian situation, after scaring everyone with this sudden move they tried to diminish the event saying it was about Greece and Portugal and they will talk marginally and briefly about Italy, after noticing that it was too a pathetic attempt to cover up the real subject of the meeting they went on confirming that it was not about Italy but was going to discuss about the Italian crisis (reading: we are scared and we do not know what to do).
In the meanwhile the usual unnamed European Central Bank source was quoted telling Die Welt newspaper on Sunday that "The existing rescue fund in Europe is not sufficient to provide a credible defensive wall for Italy," the central bank source was quoted telling the newspaper in an advance text of an article to appear on Monday.
"It was never designed for that," the source added.
The newspaper said that the rescue fund might have to be doubled to up to 1.5 trillion euros. But it was not clear if it was the central bank source calling for the increase. Regardless this is sending a message to international investors that the ECB would be unable to shield Italy if push come to shovel. Either this is an insanely naive declaration or the message is forget a bailout of Italy if the situation get dire next week. Furthermore even if it was doubled Spain is facing a bigger spike than Italy on yields and once this escalate it would be impossible to bailout 2 of the biggest economies in Europe which would be followed almost immediately by France.
Right to the point as usual and back to writing right in time for the epilogue Ambrose Evans Pritchard in his article on The Telegraph is clearly outlining the sorrow state of Spain and Italy.
A brief excerpt below:
If the ECB's Jean-Claude Trichet is right in claiming that Europe was on the brink of a 1930s financial cataclysm a year ago - and I think he is - it is hard see how the threat is any less serious right now.
Yields on Italian 10-year bonds hit a post-EMU high of 5.3pc on Friday. This is not just a theoretical price: the Italian treasury has to roll over €69bn (£61bn) in August and September; it must tap the markets for €500bn before the end of 2013. The interest burden on Italy's €1.84 trillion stock of public debt is about to rise very fast.
Spanish yields punched even higher, through the danger line of 5.7pc. The bond markets of both countries are replicating the pattern seen in Greece, Portugal, and Ireland before each spiraled into insolvency. And the virus is moving up the European map. French banks alone have $472bn (£394bn) of exposure to Italy and $175bn to Spain, according to the Bank for International Settlements.
Italy's premier Silvio Berlusconi has chosen this moment of acute danger to undermine his own finance minister, Giulio Tremonti, the one figure in his cabinet respected by global bond vigilantes. "He's not a team player, and thinks he's genius and that everybody else is a cretin," said Mr Berlusconi.
Meanwhile, Mr Tremonti is living free in the Rome house of a political ally just arrested on corruption charges. Resignation rumours circulate hourly. You can hear the knifes sharpening.
"The government ceased to exist months ago," wrote Massimo Giannini in La Repubblica.
"What other country would allow itself the suicidal luxury of offering cynical markets such a spectacle of political disintegration and institutional decay at a time when Europe is destabilized by Greece's sovereign debt and haunted by contagion? We have a band of poltroons dancing under the volcano, and the volcano is about to erupt."
The PMI data for Italy and Spain have dropped below the recession line. The Goldman Sachs global PMI indicator shows that 80pc of the world is tipping into a slowdown, including India and China. Taiwan's bell-weather exports to China sank 12pc in June from the month before.