Tag Archives: Italy

World Erupts in Anger: “You Can’t Eat Money!” (Photo Coverage)

This is one of the very few posts I’ve hoped I never had to deliver. But I’ve seen it coming for a long time. Tonight the world has exploded in anger and severeal places i sheere violence. I won’t comment much. These news photos from around the globe speaks for them self. I only hope that our political leaders and the powerful global corporations are able to read the message; that they understand the depth and severity of the crisis and realize that this is NOT ONLY A FINANCIAL CRISIS! It’s also a social and ecological crisis – and we can not solve one without solving the other two.

All over the world protests erupted, Saturday, several places resulting in brutal violence as protesters clashes with local police forces. At the moment the most violent scence are coming from the Italian capital, Rome. All protestes seems to gather around the same three slogans, indicating that theres may be some kind of coordination. These slogans are: “You Can’t Eat Money.” “We Are The 99%,” and “We Support Occupy Wall Street“.

The photos are syndicated by Associated Press and aftenposten.no.

ROME (Italy)

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AMSTERDAM (The Nederlands)

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BERLIN (Germany)

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MÛNCHEN (Germany)

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ZURICH (Switzerland)

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OSLO (Norway)

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LONDON (England)

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BUCAREST (Romania)

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TORONTO (Canada)

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TOKYO (Japan)

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HONG KONG (China)

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SAN DIEGO (USA)

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SYDNEY (Australia)

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South Korea

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Taiwan

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MANILLA (Phillepines)

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Goodbye Eurobonds! (Or Hello?)

It could have been a part of a possible solution to prevent a collapse of the European monetary system – the eurobonds. But as pointed out in numerous articles here at EconoTwist’s, it is not possible for the euro zone governments to agree on anything fundamental as long as there’s no real union of Europe. Some of you may be familiar with the term “Tragedy of the Commons” – the story about the eurobonds turns out to be yet another illustration of this human imperfection.

“Eurobonds are an appealing concept in theory, but cannot be implemented in today’s Europe characterized by a large debt overhang, and the absence of a credible system to enforce even the weak elements of economic governance we have now.”

Daniel Gros

“The current upheaval in financial markets has reinforced the voice of those who call for the introduction of Eurobonds as the only way to end the euro debt crisis.  However, August 2011 might well be remembered as the month during which the idea of eurobonds was murdered by the Italian political system,” Director of the think tank CEPS in Brussels, Daniel Gros, writes in commentary article at www.eurointelligence.com.

Well, if the Italians didn’t do it, somebody else would have…

The idea of introducing a new financial instrument – another way to issue more sovereign debt – might have provided the European banks with another temporary source of income.

But that’s about it…

Besides, the practical issues related to an implementation of such bonds is not possible to solve in today’s political environment in Europe.

Maybe the eurobonds belongs to the future. But for now it’s just another nice thought – much like the very basic idea of the “United States of Europe“.

Director of the think tank CEPS in Brussels, Daniel Gros, does a pretty good job explaining the details in the following article, syndicated by www.eurointelligence.com:

The basic facts of the Italian drama are well-known: in early August, when interest rates on Italian government debt soared and the Italian banking system got under pressure, the ECB started buying Italian debt on the understanding that Italy would quickly adopt a multiannual program to reduce its deficit and promote growth.

This understanding was made explicit in a letter send by the present and future presidents of the ECB to the Italian government.

Initially it appeared the country would react in a matter of days. 

But as the pressure from financial markets abated somewhat the government, under pressure from different parts of the ruling coalition, continued to change its mind on what taxes to increase and what expenditure to cut.

Growth enhancing measures went out of the window and the revenues assumptions underpinning the budgets plans became ever more shaky.

The ECB had thus little choice, but to stop buying Italian bonds, whose yields then soared again.

This finally convinced the Government that it had no choice but to toughen the budget again so as to ensure renewed support by the ECB.

Given this experience it is instructive to speculate what might have happened if Eurobonds had already been implemented by early 2011.

What variant of Eurobonds?

Imagine first, that Italy could still have issued substantial amounts of Eurobonds.

In this case the Italian government would have continued to defend its position that Italy’s fundament position was sound (relatively low deficit and strong domestic savings); and that there was therefore no need to implement a strong fiscal adjustment now.

There are always valid arguments to delay action. 

The Italian government might even find a Nobel prize laureate who would support the notion that any attempt to implement a fiscal adjustment now would be self-defeating because it would depress demand so much that in the end the deficit would not improve.

Defenders of Eurobonds would say that ‘the EU’ (i.e. the eurogroup of finance ministers) might have imposed the adjustment anyway.

This is possible, but not likely, because in the absence of a clear market signal the need for action can always be disputed.

But what would have happened even if “the EU” had ordered Italy to do a fiscal adjustment now?

It is quite possible that the government might not have been able to find a majority in Parliament.

What then? Fines?  Why would the prospect of fines, which only embarrass the government, suddenly produce a consensus on reforms?

What if Italy had already exhausted its allocation of Eurobonds (or the EU had not allowed it to issue any more)?

In this case the price of all the Italian “non eurobonds,” i.e. those Italian bonds not guaranteed by its partners, would have tanked even more as financial markets would perceive that these bonds would be first in line in case of trouble.

Total Italian government debt is about 1.800 billion euro.  If one assumes that eurobonds might have been issued for about one half of this one would still be left with 900 billion euro, enough to drive large parts of the EU’s banking system into insolvency should the country default on it.

With or without Eurobonds, the ECB would have faced the same unpleasant choice: intervene in the secondary market or risk a collapse of the European banking system.

The Italian “summer theatre” of 2011 illustrates once more that the problem is not that a government will openly defy its euro zone partners, but rather that its parliament is so divided that the government cannot push through the measures that are required.

Greece has already shown that countries default not because they deliberately choose to, but because society at large is so divided that it is impossible to make the necessary adjustment to ensure orderly debt service.

This leads to the final thought: What would happen to the “eurobonds” issued by a country which does not comply with conditions set in Brussels or Frankfurt? 

Would financial markets really believe that Germany would honour its guarantee if the country concerned had not abided by its own obligations?

The German government might well argue that the country had destroyed the essential elements (‘Geschäftsgrundlage’ in German) for eurobonds.

Depending on the exact legal basis for Eurobonds, i.e. what jurisdiction would apply, this uncertainly could very well lead to significant yield differentials between the Eurobonds issued by different member states.

Eurobonds are an appealing concept in theory, but cannot be implemented in today’s Europe characterized by a large debt overhang, and the absence of a credible system to enforce even the weak elements of economic governance we have now.

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Daniel Gros is Director of the think tank CEPS in Brussels.

 

So, the confusion continues…

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Credits Rally Without Credibility

The CDS spreads tightened significantly, Tuesday, and the rally gained momentum through the afternoon as investors placed their bets on a Greek “yes” to more austerity measures. Banks also rallied in spite of rumors that as many as 15 institutions will fail the upcoming stress test.

“The markets are aware that the banking books aren’t being tested for sovereign defaults, leaving a sizable credibility deficit.

Gavan Nolan

Well, here at the Econotwist’s we are just as skeptical to this rally, as we are to the stress test. Even if the Greek should accept another round of crippling austerity, the market participants are still pricing an 80% chance of a national default. And the banks? Hahaha…suckers!

I guess most of you are familiar with terms like “suckers rally” and “pump&dump.”

However , I won’t stretch that any longer – we’ll just have to wait and see, okay.

Now; according to Markit Financial Information,  the so-called “French proposal” for private sector participation in Greece’s bailout appears to be gaining traction, with reports that the German banking association sees the French model as a potential solution.

Fitch Ratings have declared that the proposal would still be regarded as a default by the agency but  the market didn’t seem to give a damn.

The Greek parliament have been debating the austerity bill while the country is paralyzed by a two-day general strike and protesters are raging in the streets of Athens.

Inevitably, the protests have turned violent again and ought to serve as a reminder that the government will find it difficult to implement these measures,  even if they get the votes they need tomorrow and Thursday.

“Nonetheless, the markets were content to ignore the unrest and rally,” credit analyst Gavan Nolan at Markit Credit Research writes in his Intraday Alert.

Adding: “Participants might be looking to add risk ahead of the vote in expectation of a relief rally if the government wins.”

The Markit iTraxx SovX Western Europe index was about 9 bp’s tighter, at 233,5 basis points, driven by the peripheral EU countries.

Spreads in Spain – perhaps the most important gauge of contagion – tightened significantly,  and closed at 288 bp’s.

Italy also rallied. The sovereign sold EUR7,885 billion of government bonds this morning, close to the upper end of the target range.

“Demand for the debt was solid and higher than the previous auctions, though the 1.32 bid-to-cover ratio for the 10-year BTP was relatively weak,” Gavan Nolan points out.

The tightening in the peripherals seemed to fuel a broader market rally.

The Markit iTraxx Europe closed about 2,5 bp’s tighter, at 113,25, and it was companies based in the EU periphery that drove the rally, like Gas Natural and  Telecom Italia.

A considerable skew has opened up in the index in recent days, the largest since the roll in March, according to Markit.

“The history of the index suggests that this will narrow relatively quickly,” Mr. Nolan writes.

That means that the iTraxx Europe most likely will widen again over the next days.

In another seemingly outburst of irrational exuberance banks also rallied, in spite of news reports claiming that between 10 and 15 of the 91 institutions who are subject to the stress tests are set to fail.

“If true, it could give the tests some much-needed credibility,” Nolan writes.

“But the markets are aware that the banking books aren’t being tested for sovereign defaults, leaving a sizable credibility deficit,” the Markit analyst concludes.

And that’s a nice and polite way of putting it.

  • Markit iTraxx Europe S15 113.25bp (-2.5), Markit iTraxx Crossover S15 425bp (-10)
  • Markit iTraxx SovX Western Europe S5 233bp (-9.5)
  • Markit iTraxx Senior Financials S15 175bp (-4.5)
  • Markit iTraxx Subordinated Financials S15 298bp (-10)
  • Sovereigns – Greece 2025bp (-40), Spain 288bp (-18), Portugal 795bp (-24), Italy 191bp (-14), Ireland 775bp (-38)

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