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ARGOMENTO: Italy Gets Nearer To Bankruptcy

Italy Gets Nearer To Bankruptcy 8 Anni, 2 Mesi fa #2068

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Plunge Brings Debt Crisis to Italy

12 Jul 2011, Bloomberg

The plunge in Italian markets overshadowed policy makers’ efforts to fix Greek finances as the euro-region’s debt crisis infected Europe’s largest borrower.

Italian bonds fell for a seventh day and the country’s stocks dropped to the lowest in more than two years as Italy prepared to sell 6.8 billion euros ($9.4 billion) of Treasury bills today. Warnings by Moody’s Investors Service and Standard & Poor’s over Italy’s ability to reduce its debt, coupled with infighting in Silvio Berlusconi’s government over a budget cut plan, fueled the sell-off.

“The massive contagion from the small periphery to the big bond markets of Italy and Spain in the last four trading days has turned into the real problem,” Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London, said in a note to investors.

The rout in Italy underscored Europe’s inability to contain the crisis that began in Greece in October 2009 and led to subsequent bailouts in Ireland and Portugal. Finance ministers last night failed to agree on how to share with creditors the cost of a second bailout for Greece to be financed primarily by its European Union allies, including Italy.

The policy makers pledged to complete “soon” the Greek aid blueprint, without giving more details. The meeting in Brussels didn’t discuss Italy, though the ministers were aware the country is now the “focus” of financial markets, Luxembourg’s Jean-Claude Juncker said at a press conference late yesterday.

Acknowledging Contagion

“Europe needs to recognize it’s no longer a crisis of small sovereigns in the euro area,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Plc said in an interview yesterday with Maryam Nemazee on Bloomberg Television’s “The Pulse” “It is becoming a euro-area wide crisis and European policy makers have struggled to accept that for some time.”

The yield on 10-year Italian bonds rose 25 basis points to 5.93 percent, the highest since 1997, pushing the yield premium investors demand to hold the debt over German bunds to a euro- era record 335 basis points.

Trading in shares of UniCredit SpA (UCG), Italy’s biggest bank, were suspended limit down after the stock more than 7 percent, pushing the benchmark FTSE MIB index down more than 3.5 percent for a third day. UniCredit, one of the biggest holders of Italian bonds, has fallen by 20 percent and shed almost 9 billion euros in market value since July 4.

Courting Disaster

Insurance against an Italian default rose to a record yesterday, equaling Romania, which is rated seven levels below Italy’s Aa2 by Moody’s at the lowest investment grade. Italian bonds slumped more than the debt of Spain, with the premium to hold Spanish debt over Italian bonds narrowing to 30 basis points, the lowest since November 2010.

Italian bond yields are nearing “disaster,” according to Gary Jenkins, head of fixed-income at Evolution Securities Ltd. Greece, Ireland and Portugal all sought international assistance after their 10-year yields rose past 7 percent.

Italy has more than 500 billion euros of bonds maturing in the next three years. That’s about twice as much as the 256 billion euros extended to Greece, Ireland and Portugal in their three-year aid programs.

At almost 120 percent of gross domestic product, Italy’s debt is the EU’s second largest by that measure after Greece. Its 1.8 trillion euros of borrowing in nominal terms is more than the combined debt of Greece, Spain, Portugal and Ireland.

Borrowing Costs

The surge in Italy’s borrowing costs, if sustained, will increase its financing cost, which the government estimates will total about 75 billion euros this year, or almost 5 percent of GDP. That figure is expected to rise to 85 billion euros by 2014.

Jefferies International Ltd. estimates that if the average interest rate on the debt rises to 6 percent over that period rather than the 5 percent forecast, financing costs will jump by another 35 billion euros.

Until this month, Italy had avoided the worst of the debt crisis fallout. Its budget deficit of 4.6 percent of GDP last year was less than half the shortfalls in Greece, Spain and Ireland. The country dodged the real-estate bubble that devastated the Irish and Spanish economies. More than half its bonds are held domestically, which with the low level of household debt, was seen as demand and shielding Italy from some of the turbulence in international markets.

‘Better Shape’

“Italy is still in better shape,” Michael Spence, a Nobel-winning economist, told Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.” “It has a high amount of debt, but it has a high savings in the private sector, and frankly I think it can manage its way through this unless there is a huge attack on the euro and risks spreads go way up.”

Confidence in Italy has eroded after both Moody’s and S&P said they were reviewing their ratings. The country’s anemic growth will make it difficult to tame the debt even if the government achieves its goal of balancing the budget in 2014, they said. Moody’s last cut Italy’s rating in 1993. S&P has an A+ rating and last cut in October 2006.

Italy’s economy expanded an average 0.2 percent annually from 2001 to 2010, compared with 1.1 percent in the euro area. Growth was 0.1 percent in the first quarter, a fraction of the 0.8 percent for the euro region.

Signs of internal dissent over Finance Minister Giulio Tremonti’s 40 billion-euro austerity plan and speculation over his possible resignation also rattled markets.

‘Cordial’ Meeting

Berlusconi held “a long and cordial working lunch” with Tremonti on July 8, his office said in an e-mailed statement, the same day newspaper la Repubblica published comments by Berlusconi saying Tremonti wasn’t “a team player.”

Neither Berlusconi nor Tremonti has spoken publicly since the slide in Italian markets accelerated on July 8, though other European officials have come out in Italy’s defense.

Tremonti’s budget plan is “very convincing,” German Finance Minister Wolfgang Schaeuble said yesterday in Brussels. “Italy can get out of this situation on its own,” added Spanish Finance Minister Elena Salgado. Both said Italy won’t need a bailout.
Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants, but debt is the money of slaves.

Re: Italy Gets Nearer To Bankruptcy 8 Anni, 2 Mesi fa #2069

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Italy and Spain must pray for a miracle

Once again Europe's debt crisis has metastasized, and once again the financial authorities face systemic contagion unless they take immediate and dramatic action.

10 Jul 2011, Daily Telegraph

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.

Fall-out from Greece flattened Portugal and Ireland last week. It is engulfing Spain and Italy, countries with €6.3 trillion of public and private debt between them.

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.

"We believe the European sovereign crisis might be entering a new phase with contagion reaching the larger economies," said Jacques Cailloux, chief Europe economist at RBS.

"It is unclear to us how this latest negative shock to confidence is going to be undone in the absence of a 'shock and awe' policy response."

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."

What can the eurozone now do to trump its last "shock and awe"? More loan packages solve nothing. Pretending that this is just a liquidity crisis will no longer wash.

What it will take is a belated recognition by Germany that this crisis is not a morality tale contrasting virtuous, thrifty Teutons, with feckless Greco-Latins and Guinness-befuddled Celts, but rather a North-South structural crisis caused by the inherent workings of monetary union.

The implications of this are profound. Germany must now be willing either to buy or guarantee Spanish and Italian debt, and in doing so to cross the Rubicon to fiscal and political union, or accept that EMU must break up with calamitous consequences for German foreign policy. Large matters, beyond the intellectual vision of Germany's current leaders.

It will also take a total purge of the ECB's leadership, which clings to its madcap doctrine that monetary policy can be separated from other emergency operations, and which chose last week of all moments to raise interest rates again and kick Spain in the teeth. It did so knowing that the one-year Euribor rate used to price more than 90pc of Spanish mortgages must rise in lock-step. As one Spanish commentator put it, the Eurotower in Frankfurt should be torn down, and salt sown in the ground.

If the governor of the Banco de Espana really endorsed this rate rise (supposedly "unanimous") he should be hauled before the elected Cortes and ordered to explain such locura: if the EU authorities object, they should be told in crisp terms that Spain is a great and ancient sovereign nation facing a national emergency and will do as it sees fit.

Where is the inflation threat? The eurozone's M1 money supply has contracted on a month-to-month basis over the past two months, with sharper declines in the periphery. Annualized M1 growth is falling, not rising: it was 2.9pc in March, 1.6pc in April, and 1.2pc in May. Broader M3 grew at a rate of 2.2pc over the past three months.

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.

The calamitous US jobs data released last Friday leave no doubt that the US remains trapped in depression. Broad U6 unemployment rose from 15.8 to 16.2pc in June; the numbers in work fell by a quarter million to 153.4m; the average time without a job reached a fresh record of 39.8 weeks; hourly pay fell; hours worked fell; the employment/population ratio crashed to new lows of 58.2pc.

This is not a time for the ECB to raise rates. It has repeated the error made in mid-2008 when it tightened into the final phase of an oil shock, when half the eurozone was already in recession. Once is careless, twice is unforgivable.

Italy has eschewed the maelstrom until now, despite losing 30pc in unit labour competitiveness against Germany under EMU. It has lower private debt than G7 peers. Its banks dodged the US and Club Med housing bubbles. However, they lent instead to the Italian state, the third biggest debtor in the world with liabilities of 120pc of GDP, and that is now turning into the problem. For though Italy's fiscal deficit looks small at 4.7pc of GDP, it is not small when adjusted for a moribund economy, rising rates, and the scale of the debt stock.

Italian GDP has not grown for a decade. The official forecast is 1.1pc this year, 1.3pc in 2012, and 1.5pc in 2013, but outside analysts are gloomier.

David Owen from Jefferies Fixed Income says the "elephant in the room" is that Italy's debt interest payments will explode within three or four years if the average borrowing cost ratchets up 200 or 300 basis points. The apparently stable debt trajectory will take an entirely different shape. That is the fear now stalking markets.

It is almost pointless trying to establish exactly why this latest bout of contagion has erupted. You can blame Moody's for its downgrade of Portugal, or blame Germany's Krieg against private investors for forcing Moody's to act the way it did. The deeper cause lies in the entire machinery of wreckage created by the Maastricht process since the mid-1990s.

A full-throttle global recovery would mitigate this; a half-decade of super-easy money by the ECB to weaken the overvalued euro and stave off debt deflation would help, too. Without either, Italy and Spain can only pray for a miracle.
Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants, but debt is the money of slaves.
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