September 4, 2011

Italy's Redemption Time

A string of weekend news could make the incoming week one of the worst of this long Eurozone Crisis.

Christine Lagarde, the IMF's managing-director, said the outlook had darkened suddenly over the summer.
"There has been a clear crisis of confidence that has seriously aggravated the situation. Measures need to be taken to ensure that this vicious circle is broken," she said.

Markets are already tense after the EU-IMF 'Troika' withdrew abruptly from Athens on Friday, accusing the Greek government of failing to comply with rescue terms. German patience with Athens is already near exhaustion. Prince Hermann Otto zu Solms-Hohensolms-Lich, the Bundestag's deputy president, said Greece cannot bring its debts under control.
"We must consider whether it would not be better for the currency union and for Greece itself to go for debt restructuring and an exit from the euro," he told the Frankfurter Allgemeine.

Nonetheless this crisis is becoming more and more about Italy rather than Greece, if Greece is already a zombie state kept alive by the ECB, Italy is approaching rapidly the same stage.
The Italian treasury must redeem €14.6bn of debts this week and €62bn by the end of September, the most ever in a single month.
"We are experiencing very demanding times," Jean-Claude Trichet, the European Central Bank's president, said over the weekend. The ECB has stabilised Italy's debt over the last four weeks, capping yields on 10-year bond yields near 5pc through purchases on the secondary market.
It is unclear how much longer the ECB can keep doing this after a string of top officials in Germany described the bank's actions as illegal.

The ECB has bought an estimated €35bn of Italian debt under an implicit accord that Rome will deliver on austerity promises.
Premier Silvio Berlusconi has come close to breaching the terms by backpedaling on a wealth tax and pension reform.
Furthermore, Germany's constitutional court is expected to rule on Wednesday that Berlin's participation in EU bail-outs is allowable so long as the Bundestag is given a veto over future payments. However, there is an outside risk that it will go further, concluding that the nexus of rescue policies subvert EU Treaty law and German fiscal sovereignty and must therefore be curbed. This would amount to a "sudden stop" for EMU debt markets. The judges are aware of these risks, yet they ruled two years ago on the Lisbon Treaty that German democracy is "inviolable" and that Berlin is duty bound "to refuse further participation in the European Union" if the constitutional order is threatened.

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