July 27, 2011

A new bailout looming: Cyprus downgraded and italy under pressure

And the hits keep coming! After the launch last week of the Great Euro Marshall Plan which was supposed to cure all economic diseases once for all, the bond tragedy has resumed relentless.
Yields on Italian 10-year bonds spiked to 5.8pc on Wednesday while Spanish yields punched through 6pc once again. Analysts remain perplexed by the decision of Italy's treasury to cancel bond auctions in mid August due to lack of liquidity and "reduced financing needs". Italy was expected to raise €68bn (£60bn) in August and September.
In the meanwhile there is a new entry in the bailout club.
Cyprus has been downgraded today two notches from A2 to BAA1 due to "fractious politics", exposure to Greece and the disaster of the energy crunch caused by the explosion and destruction of his main power plant on the 11th of July which destroyed 60% of Cyprus electricity output.
The darkening picture in Cyprus raises concerns that a fourth eurozone country might soon need some sort of rescue, exhausting bail-out tolerance in Germany, Holland, Finland and Slovakia, where a wing of the coalition has denounced the EU accord.
"The markets have started to see all the flaws in the summit deal," said David Owen, of Jefferies Fixed Income. "They know there has been no increase in the size of the European Financial Stability Facility (EFSF) and that it will not be in any position to intervene in the Spanish and Italian markets for quite some time because the changes have to be ratified by all parliaments."
"Unless the European Central Bank (ECB) steps in to buy bonds, this is going to be tested by markets over the summer. EU leaders have sent absolutely the wrong signal by thinking they have done the job and can now go on holiday," he added.
But the most interesting and scary piece of news today is the following:
Italian bank stocks fell sharply in Milan with Intesa down 5pc and Unicredit off 4pc.
Deutsche Bank said it had cut its exposure to Italian debt from €8bn to €1bn since the end of last year, mostly by purchasing credit default swaps (CDS). This suggest Europe's banks have been the main buyers of Italian CDS for hedging purposes, rather speculators as claimed by Italian leaders. It appears that core Europe started now for quite a while to dump the peripheral PIIGS.
The economic outlook continues to darken in Italy. The manufacturing index fell for a fourth month in July, dipping below the contraction line of 100. Italy's business lobby Confindustria said growth would be "almost nil" this quarter. The group's leader Emma Marcegaglia said Italy's political system was unravelling, leaving industry to its fate.
Net foreign liabilities in Italy have reached 26pc of GDP, the Italian government leitmotiv has been always that Italy is safe since most of the debt is owned by Italian families, this has not been the case since now for some time regardless of the Prime Minister's media propaganda.
Italy is cushioned for some months and the traditional summer shutdown will let the country slumber through till September unless of course a major event wreak havoc on the international markets.
September though will be torture for PIIGS.

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