While we were celebrating a good night fending off the hounds of conservatism, Europe reached the point of no return. Italian bonds surged overnight. They got as high as 7.48%, before going back down at press time to 7.25%. Greece, Portugal and Ireland all sought bailouts once their bond yields hit 7%. At this rate, Italy could lose the ability to borrow. And Europe doesn’t yet have the financial arrangements in place to absorb an Italian bailout, nor do they have the will – some would say the mechanism – to print it.
Worse, this becomes a problem for holders of Italian debt, because of that margin problem I mentioned previously:
The cost of using Italian bonds to raise funds rose on Wednesday after clearing house LCH.Clearnet increased the margin on debt from the euro zone’s third largest country at a time when its bonds yields are close to levels deemed unsustainable.
Banks use government bonds as collateral to access cash in the repurchase (repo) market, in which a handful of clearing houses play a vital role, assuming lending risks to provide institutions with the cash.
Clearing houses, such as LCH.Clearnet, collect cash in the form of margin on individual trades, which they hold centrally to refund members left out of pocket in the event of a default.
When LCH.Clearnet Ltd took similar action on Portuguese and Irish debt as bond yields soared, it added to selling pressure on the paper. Both countries were later forced to seek bailouts.
This becomes a vicious cycle. Creditors want higher yields on debt as the margin goes up, and that drives up the margin. This will affect margin calls starting tomorrow, so that’s the real day to watch Italian bonds.
The backdrop to all this is the sudden resignation of Silvio Berlusconi, in his second term as Prime Minister. After an emperor-has-no-clothes vote on a routine budget bill, which passed without a majority, Berlusconi offered to resign after the Italian Parliament passed his austerity bill. Since the bills could take weeks if not months, it’s correct to see this as possibly buying time to rebuild his coalition or to embark on an election strategy for the vote that will follow. Berlusconi has been declared dead a number of times, but when you own practically the entire media and have more money than any other Italian, you tend to have nine political lives or more.
What’s not in his favor is that the European leadership, muscling in on Italy’s national sovereignty, wants those austerity measures passed as soon as possible, as they watch the bond yields rise. The muscle is coming in:
A European Commission delegation is expected to arrive in Rome on Wednesday to monitor Italy’s compliance with its debt-reduction targets and the long-promised measures to lift the economy out of a feared double-dip recession. David Lipton, deputy head of the International Monetary Fund, is to follow next week.
Olli Rehn, the European Union’s economic and monetary commissioner, on Tuesday night expressed alarm over the widening yield gap between Italian and German 10-year bonds, which jumped back above 490 basis points – close to euro-era highs reached earlier in the day – after a key parliamentary vote demonstrated that Mr Berlusconi’s government had lost its absolute majority.
“The economic and financial situation of Italy is very worrying,” Mr Rehn said in Brussels.
One of the key austerity measures, an increase in the retirement age, is virulently opposed by Berlusconi’s main coalition partner, the far-right, nationalist Northern League. Umberto Bossi, head of the Northern League, is probably the first name on the European Commission and the IMF’s list. But the quicker Berlusconi gets out, and a broad coalition government can take over, the better. Like in Greece, that’s what it will take to deliver their austerity regime.
But the fact that the bond yield surged even after Berlusconi, whose erratic leadership was seen as a major factor in Italy’s crisis, offered to resign, doesn’t bode well for Europe. And the Greek situation continues to be a mess. Lucas Papademos, a non-politician, has agreed to become Prime Minister, but squabbling among the parties has delayed the transition. EU leaders wanted a written pledge from the opposition New Democracy Party that they would abide by the terms of the new bailout/austerity regime. Antonis Samaras, the leader of the party, balked. New Democracy had already written a communique pledging to reverse the austerity measures once they got into power. The politicians are angling for the next elections:
In one of the stranger twists, Mr. Papademos is apparently insisting that the current finance minister, Mr. Venizelos, who will most likely run for prime minister in the next elections, step down. But Mr. Samaras, who would like to run against him, is demanding that he stay, some local news outlets have reported.
More from the Athens Times.
All of this political gamesmanship, and the increasingly brutal demands from the European leadership, is in service to saving the euro, which is really not worth saving. The euro, and more specifically the structure of the Eurozone, is a large part of this problem. Either tighter fiscal and monetary integration, or a breakup, might actually work. But the current system is impossible, and it’s destroying the lives of the people who live in the unfortunate countries suffering through a forced depression.
The euro has helped both to create and sustain the crisis in Europe. First, it caused interest rates to plunge in southern Europe, encouraging countries such as Italy and Greece to go on a borrowing binge. Now the single currency rules out the options that postwar Italy and others traditionally used to cope with high levels of debt: inflation and devaluation of the currency. Neither policy was cost free, but they provided an alternative to the “internal devaluation” (otherwise known as wage cuts and mass unemployment) that is currently being urged on Italy, Greece and much of southern Europe.
The global financial crisis exposed the euro’s weaknesses. When it first became apparent that Greece was in serious trouble, in 2009, the EU set itself two tasks. The first was to resolve the Greek crisis. The second was to convince the markets that Greece is an isolated case that bears no resemblance to the rest of the eurozone. They have failed comprehensively in both tasks [...]
Some argue the destruction of the single currency will destroy the EU itself. But such alarmism risks becoming a self-fulfilling prophecy. Key European achievements such as the single market, border-free travel and co-operation on foreign policy preceded the single currency and they can survive its demise. Rather than insisting that the break-up of the euro is unthinkable, Europe’s leaders need to start planning for it.
Indeed.




30 Comments

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david, critical mass has been reached and a huge amount of new money will be needed to stabilize italy (albeit fruitlessly, imo)
the ecb will take a crack at buying italian bonds in massive quantities but that won’t be enough
so the pressure will be on the ecb to print money, which is contrary to the ecb’s mandate and vehemently opposed (so far) by the german government which controls the ecb
if the ecb deosn’t print money fast, the only viable source of money is the imf, which is controlled by the u.s. and 17% funded by american taxpayers
there have been repeated statements by u.s. government officials and dc pundits (the plutocrats) that the imf must be prepared to bail out europe
this eurobomb is heading our way and i’d sure love to see someone with wasta write about this before it’s a fait accompli
if americans don’t want to bail out europe and wall street (again) we better do something about it right quick or it’s going to happen before we know what hit us
How’s that New World Order working out for y’all?
I read the greek politicians are fighting NOT to be in the cabinet, and that samaras is furious he is being asked to sign the austerity pledge. his cover has been blown and if he signs it his fake promise to reverse it will be exposed. also what the crises in europe is showing is that democracy is a farce as the bankers behind the scenes try to put their puppets in and the people have no say. We only get a say when it matters not, but now that the bankers are fighting to maintain their control they have ripped apart and exposed the facade we call democracy.
They did yesterday and the day before. They might have keep the yields from breaking 8%, at least for awhile. But tomorrow will be a bloodbath once the margin calls start.
You’re going to see ugly impact on the French banks unless a LOT of money appears sometime before Europe opens tomorrow.
Boxturtle (They’re still carrying Greek debt at 100% face)
When the house of cards collapses, will Dick Cheney be available to provide the visual and sound effects he produced on 9/11?
Okay, everybody line up here to fall on your swords for your financial backers. Right here. No pushing, plenty of room. Anybody?
Boxturtle (Bueller?)
I wouldn’t put my name on the austerity measures either. When the Greek masses storm their Bastille, anyone on that list will be blamed for the theft of Greek wealth.
Don’t bother calling Washington about this. They’re busy trying to figure out if Iran is producing weapons of mass destruction.
Fixed it for you!
Boxturtle (FWIW, of course Iran is developing nukes. Given the rhetoric from US and Israel, they’d be fools not to)
Does this mean that things will be REALLY CHEAP in Greece and in Italy???
Back in the seventies when the Mexican economy collapsed, you could get 1200 pesos to the dollar. Hotel rooms in Acapulco were like $8.00 USD and dinner for four for $16.00 bucks.
Ain’t gonna be no I-talians committing Harry Carey. That’s for sure.
No new PM named in Greece per Reuters. What a fucking mess.
More to the point, they’re conducting polling research to determine how to best break it to the public that there is a mushroom cloud on the horizon if we don’t bomb, bomb, bomb Iran now.
Might be a good time to plan that dream vacation.
Now that we’re “out” of Iraq, we gotta find a new war to keep the money funnelling to the MIC.
OTOH, IMO, FWIW, as soon as the Israelis know where to place the “bullseye”, BOOM, no more Iranian nucleur weapon production.
One would have to be an idiot to take that job with the country in economic and social crisis. Somebody kinda like…….. Obama.
You gotta KNOW every morning MIchelle says to him, “SO you wanted to be president. I TOLD You that was a bad idea.”
If you’re gonna put that to music, you better contact ASCAP.
Yes, Iran is building a nuke. But going from there to war is quite a step.
I don’t trust Iran to behave responsabily with nukes, because it’s a theocracy. They might decide to strike in God’s name.
If they do, we’ll be cleaning up several cities. But their civilization will end along with their Islamic Republic.
I think Iran would sign a “You leave us alone, we’ll stop enrichment and leave you alone” deal. And I think they’d honor it as well as the Soviets honored their coldwar deals with us.
Boxturtle (meaning no provable cheating)
I was a travel agent for 28 years. The Napoli coast and Capri are particularly nice this time of year.
Dream on. Iran is not stupid, they’ve spread their atomic stuff across their country and I doubt we know where all of it is. If Israel trys to take our their program, they’ll kill a few sites but the program will go on. Is we try to do so, we’ll kill a LOT more sites, but we’ll have no way of knowing if we got them all.
In short, to stop Irans nukes we’ll either need to make a deal or change their government.
Boxturtle (Bombs won’t do the job)
“If they do, we’ll be cleaning up several cities. But their civilization will end along with their Islamic Republic. ”
………I’m not sure that isn’t a good strategy and a doable plan.
..
..
“I think Iran would sign a “You leave us alone, we’ll stop enrichment and leave you alone” deal. And I think they’d honor it as well as the Soviets honored their coldwar deals with us.”
…….OTOH, that would work too. Not as much fun though.
I apologize, that was inappropriate
Actually, if I was in charge, I’d poison their water supply and blast Led Zeppplin at them 24/7 at 180 decibels.
Italy was better off when it had a new government every Tuesday.
Yes, things will be really cheap in Greece if they abandon the Euro–that’s how they will be able to recover because people will flock to Greece, spend money, buy stuff, and help the Greek tourist industry.
If they stay on the Euro, the only way to save all these other countries is to go against Germany and print money which will not only make things cheap in Greece but in all of the EU. This would make things produced in Germany cheap as well, and probably increase our trade deficit with Europe. It would absolutely hammer the Swiss and force them to print money to maintain their current peg/floor to the Euro. Get ready to attend National Lampoon’s European Vacation Part 2 if this happened–although the Germans just aren’t going down that road.
This is assuming a substantial amount of Americans can afford a trip to Europe?
It strikes me that the obvious solution to the problems in Greece and Italy is to cancel all elections for the foreseeable future. No elections, no problem. I’m sure someone at the IMF is working out how this can be achieved without too much bloodshed.
The Amalfi coast. Or Sicily. We vacationed near Syracuse this spring. Glorious.
Again, former travel agent…”Tips for Greece”
1. They have lots of nude beaches you’ll be tempted to visit
2. Not all women who sunbathe nude SHOULD be doing THAT.
3. Guys wear those little bitty “speedo” type bathing suits. And, not ALL of them should be doing THAT either.
4. Mykonos is the place for gays and bi’s. If you ONLY play for the home team, you might want to go to Rhodes.
Try also northern Italian coast near border with France. Santa Margherita Ligure.
atomic money bomb
half life unknown
immanent dispersal
can someone tell me why Iran is the bad guy on the block, and everybody’s solution is to bomb them off the map. Israel has nuclear, Pakistan too. I doubt Iran would use it preemptively if they had it.
The politics of the middleast is complicated and an attack on Iran would be beyond sanity by a very long stretch. The kick off to utter annihilation of us all.
http://www.redicecreations.com/radio/2011/10/RIR-111020.php
Interesting interview on Middleast
This fucking world is completely insane and I wear a tin foil hat given to me by my daughter,
(for protection heh), as a birthday present in honor of 70 years of life. And in that life I have seen much that informs what I say…but then I wear that tinfoil hat..so who knows.
Bombing, killing, slaughter, and evisceration are old school..what got us here. Why we all write and piss and moan. It is time for the death of that way..it doesn’t work and never changes anything, ever.
The ones who prosper in that system are the very people written about in this post. They finance both sides and indemnify the winner to pay the losers debt. The money just floats around between the big players, while we are left with the blood.
This financial Armageddon is not yet complete and borrowing or printing more money(same thing) to pay back money that is borrowed can only lead in one direction. Recession is a mild word for what is coming so by all means go to Italy and spend spend spend it will be worth pennies on the dollar soon enough, or stock up on things of value like food heh.
This maybe OT but to me it is ll connected.