Attention turns from Greece to Italy

Crisis in Italy Deepens, as Bond Yields Hit Record Highs

Excerpts:

Italy’s financial crisis deepened on Wednesday despite a pledge by Prime Minister Silvio Berlusconi to resign once Parliament passes austerity measures demanded by the European Union.

The move failed to convince investors, propelling Italy’s borrowing costs through a key financial and psychological barrier of 7 percent, close to levels that have required other euro zone countries to seek bailouts.

...

yields on 10-year Italian government bonds — the price demanded by investors to lend money to Italy — surged on Wednesday to 7.4 percent, the highest level since the adoption of the euro more than 10 years ago.

In Europe’s months of crisis, yields in excess of 7 percent have triggered calls for bailouts and the subsequent demise of governments in Ireland, Greece and Portugal, but Italy’s debt is much higher than in those countries. The 7 percent barrier is seen partly as a symbolic threshold, but it also reflects hard financial facts: borrowing costs at that level make it difficult for Italy to raise new funds to pay off what it owes. The figure is widely seen by bond market analysts as unsustainable.

In the end, thus, it was not the sex scandals, the corruption trials against him or even a loss of popular consensus that appeared to end Mr. Berlusconi’s 17 years as a dominant figure in Italian political life. It was, instead, the pressure of the markets and the European Union, which could not risk his dragging down the euro and with it the world economy.

Although Mr. Berlusconi’s exit was not immediate — weeks of political wrangling over the austerity measures probably lie ahead — political commentators said they could see no escape this time for the prime minister, whose Houdini-like ability to wriggle free from scandals is legendary.

“A season is over,” said Mario Calabresi, the editor in chief of the Turin daily newspaper La Stampa, who said Mr. Berlusconi told him that he was not only stepping down, but also would not run for office again.

With fears that the debt crisis would spread from Greece to Italy, whose economy is too big to bail out, pressure had been building on Mr. Berlusconi to resign for weeks, including recently from members of his center-right coalition. Even the Roman Catholic Church, whose support is crucial for any Italian government, began harshly criticizing him.

Comment: Imagine a nation having to borrow at a 7.4% rate. An individual can finance a mortgage at 4% here. My HELOC rate is at 4%

Greece to exit Eurozone?

The Greek referendum call is, while it lasts, effectively a plebiscite on euro membership.

Excerpt:

I say "while it lasts" because the opposition is mobilising a parliamentary manoeuvre to bring down the government, which may succeed - returning Europe to its status quo of containable trauma.

If Greeks reject the 50% controlled default on the debts they owe to the banking sector, then the arithmetic I revealed on Newsnight on the eve of the Euro summit comes into play - without a 50% haircut, and a further 130bn euro bailout, on top of 110bn, Greek debt spirals out of control and the country goes bust.

At this point, the value of the debt falls to maybe 10% of its face value and Greece has broken all the rules of euro membership.

The euro leaders will be faced with the option of a forced transfer of taxpayers' money to shore up the entire Greek economy with no surety, and no "local representatives" as currently planned. Or Greece leaves the euro.

...

Greeks - even those fiercely opposed to Pasok from the left and right - are resigned to the fact that the country faces years of painful restructuring. The real question at issue is a) under whose control and b) in whose interest?

It is for this reason that, while the Greek CP wants out of the euro, the growingly influential far left parliamentary group SYRIZA does not, and neither does the hard-right religious party LAOS. Everybody can see that an external devaluation will be chaotic, painful and cause its own kind of social unrest, just as the attempted internal devaluation is doing.

But events are moving fast. Even as the Greek centre-left toys with the concept of repudiating "odious" debt, as per Latin America in the 1990s, the debt is being concentrated into the hands of other sovereigns - the European Central Bank (ECB), the International Monetary Fund (IMF), other governments…

The reason the markets are scared is not just because of the difference between 50% and 90% default, it is because in the old scenario (AKA the one we agreed on last Thursday morning!) this sovereign-held debt was out of the reckoning. An "Oxi" vote (it means "No" and was scrawled on thousands of banners hung from balconies last Thursday) would signal default across the whole range of debt, causing new turmoil for European states.

What caused Mr Papandreou's sudden move? Even some of the MPs closest to him had no idea it was going to happen.

Many of my Twitter correspondents suggest it was the vehemence of "Oxi Day" last week, leading to clashes between parading soldiers and protesters and local Pasok politicians getting hounded off the parades.

Comment: What's Oxi Day? The scenario that makes the most sense to me is that Greece exits the Eurozone and stiffs their creditors!

Greek "Haircut"

EU Sets 50% Greek Writedown, $1.4T in Rescue Fund

Excerpt:

European leaders cajoled bondholders into accepting 50 percent writedowns on Greek debt and boosted their rescue fund’s capacity to 1 trillion euros ($1.4 trillion) in a crisis-fighting package intended to shield the euro area.

The 17-nation euro and stocks climbed while bond spreads narrowed after leaders emerged early today from a 10-hour summit in Brussels armed with a plan they said points the way out of the quagmire, albeit with some details still to be ironed out.

“Overall the outcome is better than we anticipated one week ago,” Laurent Bilke, global head of inflation strategy at Nomura International Plc in London, said in an interview. “There are several issues left open, but I do believe that getting a more necessary debt relief for Greece is a pretty important step.”

Last-ditch talks with bank representatives led to the debt- relief accord, in an effort to quarantine Greece and prevent speculation against Italy and France from ravaging the euro zone and wreaking global economic havoc. Greek Prime Minister George Papandreou will address the nation at 8 p.m. in Athens to outline the summit’s ramifications for the country at the eye of the two-year sovereign debt crisis.

Merkel: 50 pct haircut to cut Greek debt by 100 bln euros

Excerpt:

Private owners of Greek bonds will accept a 50 percent writedown on their investment, enabling both a 100 billion euro cut in Greece's sovereign debts and allowing a new Greek programme of aid of 100 billion euros, German Chancellor Angela Merkel said on Thursday.

"Our goal is that the debt of Greece by 2020 is 120 percent (of GDP)," Merkel told journalists after a meeting of euro zone leaders.

"A nominal haircut of 50 percent has been agreed. On the basis of this, we will have a new programme for Greece with a value of 100 billion euros."

She said the public sector would make a further 30 billion euro contribution towards private sector participation.

Comment: The operative word is "cajoled". Of course 50% is better than nothing!

It’s All Connected: An Overview of the Euro Crisis

It’s All Connected: An Overview of the Euro Crisis

Comment: Interactive NYTimes graphic. Image Source

Greek Default ... what could happen

Eurozone: A nightmare scenario

Excerpt:

...

the talk among investors and some European politicians this week has been of Greek default. The graphic below outlines the likely consequences of a default by Greece. It is a description, not a prediction – a description that includes the possibility of the break-up of the eurozone

Comment: Very interesting. Graphic is a screen capture from the interactive graphic

How can one broke country lend money to another broke country?

Comment: Bob Zemeski, missionary to Ireland, sent this my way. Somewhat humorous in a tragic kind of way. Watch all ... wait for the last line .... towards the end ... the US is mentioned (guess with what other country)

Euro Debt Crisis - 2 views

Europe 2020: Things are pretty bad these days for the economies of Europe. But the crisis paves the way for an incredibly strong future.

Excerpt:

[While] Europe's crisis could very likely worsen. But if there is a positive scenario, it's this: by 2020, Europe's governments will—out of simple necessity—have become more efficient and less intrusive, the EU will have turned itself into a borderless and dynamic single market, and the continent's least competitive economies will have been forced to reform and innovate. If, that is, Europe's leaders don't let this crisis go to waste.

Comment: From Newsweek ... the "through rose-colored glasses", "Pollyannish" view

AND then there is the George Will view!

European Union: A coalition of irresponsibility

Excerpts:

Greece represents a perverse aspiration -- a society with (in the words of Wisconsin Republican Rep. Paul Ryan) "more takers than makers," more people taking benefits from government than there are people making goods and services that produce the social surplus that funds government. By socializing the consequences of Greece's misgovernment, Europe has become the world's leading producer of a toxic product -- moral hazard. The dishonesty and indiscipline of a nation with 2.6 percent of the eurozone's economic product have moved nations with the other 97.4 percent -- and the United States and the International Monetary Fund -- to say, essentially: The consequences of such vices cannot be quarantined, so we are all hostages to one another and hence no nation will be allowed to sink beneath the weight of its recklessness.

Recklessness will proliferate.

"The coining of money," said William Blackstone more than two centuries ago, "is in all states the act of the sovereign power."

But the European Union is neither a state nor sovereign enough to enforce its rules: No euro-zone nation is complying with the E.U. requirement that deficits not exceed 3 percent of gross domestic product.

...

If money represents, as Emerson said, the prose of life, the euro reflects a determination to make European life prosaic. It is an attempt to erase nationalities and subsume politics in economics in order to escape from European history. The euro pleases dispirited people for whom European history is not Chartres and Shakespeare but the Holocaust and the Somme. The euro expresses cultural despair.

It also presupposes something else nonexistent. The word "democracy" incorporates the Greek demos -- people. As the recent rampages of Greece's demos, and the reciprocated disdain of Germany's demos, demonstrate, Europe remains a continent of distinct and unaffectionate peoples. There is no "European people" united by common mores.

Comment: The US is next .... "The U in the E.U. -- the unifying thread -- is indiscipline. Increasingly, it also is the unifying characteristic of the USA. "

Debt Snowball

Fears Intensify That Euro Crisis Could Snowball

Excerpts:

For Europe’s banks, the problems are twofold. Short-term borrowing costs are rising, which could lead institutions to cut back on new loans and call in old ones, crimping economic growth.

At the same time, seemingly safe institutions in more solid economies like France and Germany hold vast amounts of bonds from their more shaky neighbors, like Spain, Portugal and Greece.

Investors fear that with many governments groaning under the weight of huge deficits, the debt of weaker nations that use the euro currency will have to be restructured, deeply lowering the value of their bonds. That would hit European financial institutions hard, and may ricochet through the global banking system.

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The world’s budget deficit as a percentage of gross domestic product now stands at 6 percent, up from just 0.3 percent before the financial crisis. If public debt is not lowered back to precrisis levels, the I.M.F. report said, growth in advanced economies could decline by half a percentage point annually.

Comment: Soon to roll over the US!

Europe TARP'd itself

The Real Euro Crisis - The EU's bailout postpones the day of fiscal reckoning.

Excerpt:

A trillion dollars is a lot of money, even these days, and the European Union has demonstrated that a check for €750 billion ($972 billion) can produce a rally in European debt markets and global equities. Too bad the larger price for Sunday night's "shock and awe" intervention is likely to be paid in the further erosion of Europe's fiscal and monetary credibility.

French Finance Minister Christine Lagarde noted Monday's exuberant market reaction with satisfaction, saying that the "message had gotten through" that Euroland would defend its currency. Yes, creditors no doubt love that governments have guaranteed their high-yield loans to Greece, Portugal, Spain and any other profligate government that comes under bond-market siege. What investor doesn't like a risk-free loan that pays 9%?

But there is no such thing as a free sovereign bailout, and the EU's intervention merely transfers those risks from banks and other creditors to taxpayers and the European Central Bank. The real gamble is being made by politicians who are calculating that, by taking the risk of sovereign default off the table for now, they are giving the global economic recovery time to build and making it easier to address Europe's fiscal woes.

In a sense, Europe has decided to TARP itself. German taxpayers have undertaken to underwrite the spending of Southern European governments, with Greece playing AIG, and Portugal starring as Citigroup. Spain, we suppose, is Goldman Sachs. Perhaps it will all work. But our guess is that Germany and France will have a harder time shedding responsibility for the fiscal policies of entire nations than the U.S. Treasury has had selling shares in bailed-out banks.

There is also the small matter of the rule of law. Such bailouts are expressly prohibited by the 1992 Maastricht treaty, and that promise is now in tatters. In the euro's first serious test, the political class blinked. The resulting moral hazard will haunt the single currency for years and reduce the incentive for governments to keep their fiscal houses in order.

Comment: One senses a coming fiscal collapse! A Biblical perspective ... "fat cows .... thin cows" (Genesis 41)

Europe's Web of Debt

Europe's Web of Debt

Comment: Click link for full sized graphic

European debt map

Debt Rising in Europe - Greece is not the only country in Europe with problems with credit and debt.


Comment: NYTimes graphic ... worth a look!

Euro Debt Contagion

S&P Downgrades Spain

Excerpt:

Just one day after roiling global markets with downgrades for both Greece and Portugal, Standard & Poor's Corp. on Wednesday downgraded Spain's longterm credit-rating to double-A with a negative outlook.

"We now believe that the Spanish economy's shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed," Standard & Poor's credit analyst Marko Mrsnik said.

Comment: Imagine when governments cannot pay their own debt! How long until the US experiences this?