Are you aware that the Euro is the worse indicator to follow in order to gauge what is going on. Have you looked at CDS or bond spreads, or the collapse in their equity markets? Euro is holding up at these rates because banks are raising capital, esp. French banks which have clearly stated that they are liquidating their USD and other foreign assets since they are unable to secure USD funding at reasonable rates, seen in swap rates and in Euribor/OIS and must raise capital. Repatriation of funds, seen in the balance of payments, has surged due to banks having to raise capital. Also, lets not forget that exchange rates are very sensitive to short-term rates, so if the US is at .25%, while Euro is at 1.25%, of course FX traders are looking to arbitrage. The US dollar is a carry currency now, so to look at the Euro and base your opinion on that is completely ignorant. Look at the conditions, esp. with the banks repatriating funds, since their deposit bases are shrinking while they face massive write-down's on their sovereign debts. ZH written by Hedge funds? LOL. Wow. Keep getting your news from the "non partisan" BI.
That thought is difficult for me to fathom. How could we be so close to the brink? At this point there is zero possibility that Italy can refinance any portion of its $300b of 2012 maturing debt. If there is anyone at the table who still thinks that Italy can pull off a miracle, they are wrong. I’m certain that the finance guys at the ECB and Italian CB understand this. I repeat, there is a zero chance for a market solution for Italy. Either the ECB (aka Germany) steps in and underwrites the debt with some form of Euro bonds or the IMF (aka the USA) steps in with some very serious money.
I have acknowledged in recent articles that I misread the Italian story. I didn't see this coming at the pace that it has. Italian bond yields more than doubled in a month. I was not alone in this very big misread. I believe it has caught everyone flatfooted. Central bankers and finance officials all over the globe are crapping in their pants.
I think the Italian story is make or break. Either this gets fixed or Italy defaults in less than six months. The default option is not really an option that policy makers would consider. If Italy can’t make it, then there will be a very big crashing sound. It would end up taking out most of the global lenders, a fair number of countries would follow into Italy’s vortex. In my opinion a default by Italy is certain to bring a global depression; one that would take many years to crawl out of. The policy makers are aware of this too.
So I say something is brewing. And yes, if there is a plan in the works it must involve the IMF. And yes, it’s going to be big.
Please do not read this and conclude that some headline is coming that will make us all feel happy again. I think headlines are coming. But those headlines are likely to scare the crap out of the markets once the implications are understood.
In the real world of global finance the reality is that any country that is forced to accept an IMF bailout is also blocked from issuing debt in the public markets. IMF (or other supranational debt) is ALWAYS senior to other indebtedness of the country. That’s just the way it works. When Italy borrows money from the IMF it automatically subordinates the existing creditors. Lenders hate this. They will vote with their feet and take a pass at Italian new debt issuance for a long time to come. Once the process starts, it will not end. There will be a snow ball of other creditors. That's exactly what happened in the 80's when Mexico failed; within a year two dozen other countries were forced to their debt knees. (I had a front row seat.).....
I don’t see a way out of this box. The liquidity crisis in Italy is scaring us to death, the solution will almost certainly kill us.
Note:
The news announced last week where the IMF is providing EU countries a new "crisis" lending facility equal to 5Xs their IMF quota is a joke. What has been offered is a drop in the bucket against what is required. The La Stampa story today and this discussion are about something separate and distinct. What would be required is a step without precedent. It would dwarf what the IMF put forward just a few days ago.
These elites have their people in all the power positions in the u.s. and Europe, for example merkel and sarkozy and Mario monti are all bilderbergers and Mario monti is also the chairman of the European branch of David Rockefellers trilateral commission and monti is also a top advisor to Goldman sachs.
Here in the u.s. here are just a few examples of bilderbergers in power positions, Bernanke, geithner, hank Paulson, Paul Volker, Robert Rubin, Alan greenspan, Larry summers, etc. and in the political area are these bilderbergers, bill and Hillary Clinton, gingrich, Romney, huntsman, Perry , etc. and in all cases these are just a few of the examples.
The economies of America and Europe have been crushed on purpose to bring in a new world order one world government , and to see what it will be like ,,, pick up a copy of Orwell's 1984.
This euro crisis is obviously very seriously undermining global investor sentiment. The negative impact on growth, both in Britain and the States, is clear. It is axiomatic that the financial chaos stemming from a fully-blown, market-induced “euroquake” would cause deep aftershocks everywhere, not least across the rest of the Western world.
There is palpable relief, though, in London and Washington that attention is now squarely on the eurozone’s woes. That makes life easier for the deeply indebted Anglo-Saxon governments – which is particularly welcome for Chancellor George Osborne, given that he is about to give his Autumn Statement.
Osborne’s speech writers will, no doubt, make much of the fact that UK government bond yields last week went below those of their German counterparts. That happened, though, not because the coalition’s debt-reduction plan became more credible. On the contrary, the upending of the UK’s growth assumptions has made it even less likely that Britain’s fiscal numbers will add up.
It is essential, despite political temptations, that Osborne doesn’t use Tuesday’s statement to misrepresent this recent gilt-yield respite. The UK’s deep fiscal problems remain. It’s just that, for now, the bond market vigilantes are focused on the eurozone – which isn’t surprising. For the single currency’s difficulties are compounding by the day.
The longer this eurozone crisis continues, the more likely it becomes that “contagion” threatens the fiscal stability of Germany itself, the region’s economic powerhouse. Anyone who doubted that received a stern wake-up call last week, when an auction of 10-year German sovereign bonds was seriously under-subscribed, with investors buying just €3.9bn (£3.34bn) of a €6bn offer. Bund yields spiked across the board, taking them above those in the UK.
Many observers seem to think such market pressure means Angela Merkel will “relent”. With Berlin’s own credit-worthiness being openly questioned, the German chancellor is now apparently more likely to launch a massive “bail-out” fund for the eurozone laggards, while sanctioning overt QE “money-printing” by the European Central Bank.
I’d venture a different view. However much one particular branch of the German elite wants “the European project” to succeed, the vast majority of the German public are appalled at the idea of financing the rest of Europe. They resent not only the cost, but also (rightly) worry that one eurozone bail-out inevitably leads to another.
I reckon that surging bund yields make it less likely that Germany will agree to fund a bail-out, while letting the ECB let rip. German voters, and the country’s powerful parliament, will see rising borrowing costs as further proof of the harm the euro, in its current form, is doing. Merkel must answer to both.
Germany stood by and watched back in the 1990s, as the Exchange Rate Mechanism collapsed under the weight of its own incoherence. Since then, life has become much tougher for the big industrialised Western economies. While still head and shoulders above the rest of Europe, even Germany is now on the back foot. The country’s bellwether manufacturing PMI Index fell from 49.1 to 47.9 this month, indicating a sharp economic contraction. Germany would be unlikely to entertain money-printing and paying for a eurozone bail-out at the best of times. Under current circumstances, the chances are even slimmer.
I also think that those foreseeing “fiscal union” are also deeply misguided. We’re told that this is what Germany will insist upon as a quid pro quo for financially backstopping Europe’s southern states. Really? Merkel last week blasted the European Commission’s proposed eurobond, the issuing of sovereign debt in the name of all eurozone members but ultimately backed by Germany, labelling the idea “extremely worrying and inappropriate”.
There is clearly no hope of Germany stumping up any more bail-out cash without tighter controls on the “Club Med” countries’ purse strings. Such controls may be put in place. But that’s not “fiscal union”. The only way a single currency can work in the long term is by pooling a large share of total tax revenues and having intra-regional fiscal transfers, as in the US. Yet that will never happen in Western Europe.
Anything less, though, a souped-up Stability and Growth Pact for instance, would be too weak to succeed. When it comes to the crunch, spending rules set at the European level will always be broken by politicians answerable to their own domestic electorates.
The notion that “fiscal union” of some kind is workable, and that Germany wants it, has gained ground because that is the only way certain financial analysts can keep predicting that “Merkel will print” and the end-of-year market rally will come.
The same deluded analysts also claimed the euro-crisis was easing last week because the spread between French and German government bond yields had narrowed, while failing to mention that was only because German borrowing costs had gone up.
Portuguese debt has just been down-graded to “junk” status. Short-term Italian debt is now trading above 8pc, deep into bail-out territory.
While the eurozone endgame is impossible to know, I still think the most likely outcome is that several of the peripheral nations will leave, re-denominating their debts in pre-euro currencies, so allowing the core countries to stabilise. This, I believe, is what Germany really wants.
Scaling-back monetary union would take us to a better place, with the big eurozone economies no longer seemingly on the hook for everyone else’s debts.
A downsizing would also be far more implementable, logistically and from a banking point of view, than dismantling the entire edifice. Attempting to do that, I fear, would end in financial chaos. It would also sow the seeds of recrimination and potential conflict across Europe for decades to come.
American TV pundits were gloating last week, as US Treasury yields fell to a six-week low. “Just goes to show the underlying strength of the good old American economy”, the mantra went. The US has big fiscal problems of its own, of course, not least a $14,000bn (£9,068bn) debt burden, set to reach $18,000bn by 2016. The failure of the so-called
“Super Committee” to agree on a bipartisan deficit-reduction package highlights that America’s institutions have their own dysfunctional aspects. But, for now, Europe’s dysfunction is even worse, to the benefit of US bonds.
Yet Britain isn’t America. The pound isn’t the world’s reserve currency. The UK’s demography is far less favourable to fiscal retrenchment than that of the States. While Washington can probably keep thumbing its nose at its creditors for some time, that doesn’t apply to London.
Back in March, the Office for Budget Responsibility predicted that Britain would grow 1.7pc in 2011, and that the Government could “eliminate the structural deficit” by 2014-15. It’s now clear the UK will do well to grow by 1pc this year.
While we’ve seen some progress, Britain’s fiscal stance, for all the rhetoric to the contrary, remains incredibly loose. Central Government spending was higher in October than the same month last year. Public sector net debt was £966.6bn last month, up from £836.8bn in October 2010 – an astonishing 15pc rise, and that doesn’t include the bank bail-outs. And we’re told this is “fiscal austerity”.
Be clear, Mr Osborne, as you put the finishing touches to your Autumn Statement, the markets don’t think the UK is out of the fiscal woods. Not by a long chalk. It’s just that, for now, the vigilantes’ sights are set elsewhere.....
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