The crisis has now moved to Italy. Italy is no Ireland, no Greece and no Portugal. It is the EU’s fourth-largest economy and the eighth-largest in the world. Its bond market is the third-largest in the global financial markets. It is far too big to bail out.
The total size of the Italian government debt is €1,900bn. One quarter of this falls due over the next few years.
Italian yields are heading towards 7pc and this would mean that Italy would pay 5pc more for money than Germany. No monetary union can survive such a differential and narrowing the differential was one of the main selling points of the monetary union in the first place.
The reason the figure of 7pc is important is because once a yield hits this type of territory it will be downgraded. In this environment, the market just shuts down to the country in question. This is what we saw in Ireland, Greece and Portugal. The omens for Italy look dire.
Once the yield reaches a certain level, then a downward, self-reinforcing cycle begins which involves your pension.
Traditionally, pension funds around Europe have bought the bonds of governments like Italy, thinking they were safe. The investing rules of many (rightly) conservative pension funds debar them from holding assets which are not rated Triple A.
So if Italy is at risk of being downgraded — as is now the case — and would be guaranteed to have yields going ever higher, then pension funds will be obliged to sell their holdings of Italian bonds. This drives yields up even higher and the only buyers of Italian bonds, which would now be “junk” bonds, would be high-risk investment and hedge funds that are allowed to buy risky assets. Therefore, there would be huge general selling of Italian bonds and the “normal” markets would essentially close to Italy.
According to analysis by Dow Jones, Greek bond yields hit 7pc the day after they hit 6.5pc, Irish yields took 34 days to travel the same distance and Portuguese bond yields took 43 days. But they all went to 7pc eventually.
Given the enormous amount of Italian debt which needs to be refinanced in the next two years — close to €200bn — it is easy to see why the eurozone wants to avoid this trigger mechanism at all costs. This fear explains why the European Central Bank has hit the panic button in the past few weeks and bought over €80bn of Italian government debt — because no one else will touch it.
Present policy at the EU level is in tatters and, more egregiously, the reputation of the EU has been badly tarnished by events of the past seven days.
First, we have the sight of the Greek prime minister being forced out of office because he wanted to get a mandate from the people. This reminded many yet again of the deep fear of popular democracy that exists at the highest level in Europe.
But just because the people will not be allowed to vote in a referendum does not mean that they won’t speak or act. A few months ago, this column wrote about the Italian financial police stopping people at the Swiss border who were driving across the border to deposit money in Switzerland. Given the size of the black economy in Italy, the financial police could charge people with tax evasion while at the same time keeping liquidity in the Italian banks.
Despite this, the Bank of Italy has now revealed that at least €20bn has left Italian deposit accounts over the last two months. This will dramatically increase in the weeks ahead unless there is a comprehensive pan-eurozone settlement.
The eurozone is faced with a perfect storm of three enormously negative headwinds. The first is that growth has disappeared and doesn’t look like coming back any time soon. In fact, recession in Europe is on the cards for the final quarter of this year. The second is that without growth the enormous debt mountain that has built up in Europe over the past 15 years can’t be paid back. And the third element of the storm is the fact that we have a total absence of leadership. So you take the three together — not enough growth, too much debt and not enough political leadership — and you get a recipe for panic.
This panic will be felt all over the periphery as money leaves the periphery and goes to the core. This capital flight will undermine whatever fragile stability has been achieved in Ireland and Portugal, while at the same time exposing the unfinished business in debt-mired Spain and possibly Belgium.
ULTIMATELY, the only solution is for the ECB to take control. Taking control means buying up all the bonds that it needs to buy, replacing these bonds with money, driving down interest rates and increasing liquidity. In carrying out this approach, it also has to know that some of the bonds will not be paid. Such an approach would be financial suicide for a central bank — if it had to make a profit. But it doesn’t. So it can.
The main stumbling block to this is the German public, who will fear the inflationary consequences of this monetary jamboree.
There might also be those who believe that the bank should be extracting some concession in return for its cash. At the moment, the mainstream orthodox view is that the price for help has to be austerity. But it also has to be debt write-offs borne by the creditor. And the creditor in most cases is the German and French banks.
After significant debt forgiveness, some banks — not all — will have to be recapitalised. Initially, this should come from the bondholders being forced to take equity and then this will be bolstered by the governments or the ECB taking protected equity stakes in the banks that survive.
It is crucial that the banks’ job of providing liquidity to the economy is maintained. And if this is impossible with the present banking system, then we should create a new one. We should close down the ‘zombie banks’ and be allowed to move our deposits to new ones.
In order to even have a chance for this to proceed smoothly, the ECB will have to get its act together, find its mojo and realise it is the only institution that can save the euro. And it has to do this by Christmas.
Unless we get this enormous shift in the way the ECB thinks and acts, Italy will be locked out of the markets and the crisis we have seen thus far will appear like small beer in comparison to what is to come.
This whole Euro mess has been planned from the beginning, the Euro will collapse and global monetary chaos will yield an opportunity for those who have an agenda.
David why not provide some free advice for people in terms of preparing – solid advice not general commentary?
The markets determining democratic political leadership and dictating economic policy means financial elites are running things.
I for one see this as insane. Where does this state of affairs end.
What happens when the plunder system runs out of treasure and loot to swag bag. What then??!!
Wait…..we know why David says we only have till Christmas and that is because …….the Moon WOBBLE is on 12th December …he has come round to his economic astral subconsciousness.
Fireworks .
Thanks David – have read your commentary for a long time with great interest. However, as ‘mediator’ just mentioned (and beat me to the punch!), what can we, as Mr and Mrs Taxpayer, do to: 1. Safeguard our current savings against major devaluation – send deposits to CHF, NKr, or even good old GBP Sterling? 2. Influence the muppets that are governing this country to do what is right for us as a genuinely well-meaning people by and large, instead of repeatedly meekly acquiescing to the ECB and Franco-German dictatorship? My feeling is that the answer to both is the… Read more »
Here here, come on David get off the fence and belly up, what to do !!!
Very interesting article David. I’m beyond worry now though. Dorothy just posted on the last article a remark about Germany possibly losing their AAA rating, since they have lent a lot of money to foreign banks. I’d love to read more about that.
Good news – some one in Cork has invented biodegradable chewing gum!
Check this out –
http://www.financedublin.com/debtclock.php
Maybe it would be better if they dont succeed. Price of being in Euro is becoming too high. Being able to burn bond holders and not having others(ECB) dictate internal politics might prove better in teh long run than having a sibnglr currency despite its otehr advantages
Europe’s commitment to the banker class sounds like a scheme to consolidate assets into fewer and fewer hands. Elites always rule, everywhere. The only difference is for whose benefit (besides their own) the elites rule for. For the people as whole? For the elites only? For the elites plus “useful” non-elites (doctors, technicians, etc.)? I see Europe choosing the third route. On the other hand Europe has regularly, in the past, collapsed, with war as the means to reestablish a social order (with smaller populations of trouble makers and veterans committed to “patriotism,” that is, loyalty to elite leaders). Which… Read more »
As i see it and for someone who went through the currency crisis of 90-92 and a 16.25% mortgage there is clearly a game afoot here. Its knowing what the end game is that matters. This all stinks of a push for federalism and germany v ECB. Who has the stronger hand will determine who will win. It would be ironic if we all ended up in a German confederation of states (with the exception of the UK) without a bullet being fired or a drop of blood being spilt. The sad part of it all is that the ordinary… Read more »
I am wondering where all these billions of pension funds will go as the sovereign AAA market shrinks.
Will German bonds and other ever-narrowing “safe havens” go to zero interest? What then?
How long before this happens? Is that what the markets are mulling right now?
Ray I agree with you.. the ‘Muppets’ are preoccupied with political posturing.
It ‘s time to get of out of Dodge …
http://www.swconsult.ch/cgi-bin/banklist.pl
In terms of how Irish residents in other countries can open bank accounts in other countries etc, check out http://www.preparefordefault.ie which has some fairly detailed instruction on the subject.
All this talk about Europe is not helping what I would now call the war at home,I hear the post man outside my house and I went out to greet him and collect my post,, as we spoke about the state of this country,he said his son has lost his job and his son and the girl friend are off to oz because there nothing here .my post man said I can’t take anymore cuts my well is dry but make no mistake that’s what this government has on the cards for us . I think we will see car… Read more »
Is this the “solution”?
Headline: France and Germany have discussed a smaller, stabler EuroZone.
http://www.businessinsider.com/gamechanger-france-and-germany-have-discussed-a-smaller-core-eurozone-2011-11?nr_email_referer=1&utm_source=Triggermail&utm_medium=email&utm_term=Business%20Insider%20Select&utm_campaign=BI%20Select%20Recurring%202011-11-09
Silly question maybe.
How do you open a bank account in CHF or NKR?
Do you have to travel to these countries to do this?
So the European project with the euro as a central plank is heading for a wipeout.Our political elite gambled on hoodwinking global markets with the guarantee to bankroll an unknown level of private debt. The markets called their bluff. As any gambler with a bigger pot was bound to do. In this way our politicians demonstrated to the world the reckless and brazen incompetence underpinning decision-making in this State. We elect a Government to govern prudently, wisely and fairly. I don’t think any reasonable person could view the car crash economy before our eyes is anything other than the result… Read more »
Events have moved fast since yesterday when David penned this article so it’s worth mentioning highlights. The Italian 10 year bond has risen from 6.8% to 7.25%, well above the 7% point that David said demolished market confidence in Ireland and Portugal. Italy Needs €300 Billion to see them through but the Troika only has €200 billion to cover all needs. Berlusconi has said he will resign but no sign of a replacement. Greece remains a basket case, with no semblance of leadership, but still wants to milk every last cent it can get from the EFSF. Interestingly the Gold… Read more »
Is that Sean Fitzpatrick offering to open a bank account in the Carribean. Forget the bank account. A chunk of the yellow stuff in a good strong safe should see you through the next 10 years. The euros can be used to paper the walls on that pile of negative equity you are sitting on or as wall insulation in the case of the Priory Hall residents. Listen to nobody. Trust yourself. Remember you know more than you think you you do. Everyone who advises you has an agenda. Why the hell would they be advising you otherwise
Sorry I posted this on the wrong article earlier; ECB and Christmas – History’s echoes; Many moons ago (including wobbly ones) at this time of year I used to “sense” Christmas. My childhood was not idyllic nevertheless November’s starry skies still managed to herald the approach and existence of a “peaceful magic”. Later as an adolescent I became fascinated by the Great War 1914-’18 and quite frankly that fascination has never left me. The above sentences may seem totally unconnected but bear with me. In imagining Ypres, Verdun, Somme or Flanders etc. I guess I could easily relate to a… Read more »
What happens if the ECB fails.. doesn’t that invalidate our debt that is mostly owned now by the ECB? That could be cool..
I assume you all heard the mumblings about Iran being once again being a nuclear threat. Does this have a familiar ring to it. I can hear the likes of Lockheed singing at this news. Just watch their share price over the nexf couple of weeks. We are all getting sucked in at a rate of knots. And guess what. Some bloody war based video game is expected to gross €1bn dollars over the next couple of weeks. Surely that says it all. Between that and the latest offering from Apple ie the 4s I really think the world has… Read more »
New member, first post!
As a Nordie now in Dublin 12 years, I’ve built up a 85k EUR savings..Whats everyones feeling here on belting that back into my GBP account in the event of catastrophic EUR failure. I’m sure the UK will not be unaffected by any potential breakup but just wanted to hear some (semi?!) informed opinions. Apologies if this is covered on another thread…
Now it has really hit the fan , Italy cannot be saved , I bet Merkel and Sarkosy are being kept up all night or not getting much sleep anyway . What I would love to know is what happens to tracker rate mortgages if the euro fails ? I guess a new punt will try to be pegged to the euro . The good news is that Ireland cant get any worse for the immeidate future , our banks are rock bottom and austerity will get us to 3% borrowing of GDP . With the budget only 4 weeks… Read more »
It seems to me David’s solution is just more of the same…pour more petrol on the fire…or pour more money into the maw of the ravenous beast that is destroying our economies and will destroy our societies and civilisation if it is not destroyed; and destroyed very soon.
Greetings All. I’ve been absent for a bit. I hope you are all well. I want to recommend this article from Fintan. And add some reflections of my own to what he writes. http://www.irishtimes.com/newspaper/opinion/2011/1108/1224307206463.html?via=mr It is not merely that capitalism and democracy have parted ways; it is that capitalism, in the form of national democratic industrial consumerism, is coming to an end. The basis of power in the human world is shifting from national democratic industrial consumerism to….?? Those who work in the globalised corporate world believe themselves to be individuals successfully competing in a free market. They believe the… Read more »
Italian Samba What is the difference between Ice and Water at zero degrees ? This is what we have now in the leadership in Italy . Berlusconi is there and he is not .Currently Berlusconi is portraying his country to be ‘Ice’ . The Markets are very active and are clearly not accepting that fact and see ‘Water’ only . There is a subtle political latent energy in place now and the temperature is still the same namely zero degrees . Political stalemate is puppeteering to be ‘Ice’ . This Latent Energy is very damaging although not yet fully transparent… Read more »
Ireland will now turn borrowers who did very little wrong into tenants of Banks who did a lot wrong.
Ireland will now turn Banks who were reckless into big landlords.
And wait for it the balance of the loan owed above the value of the house will now be owed by the tenant to the landlord.
I know this may get lost in the bigger macroeconomic game being played out but who in effing hell came up with this and is trying to pawn it off as a good deal for the homeowner.
Roger Bootle, London based economist gives his views on events.
http://www.bloomberg.com/video/79866948/
He has no confidence in the leadership from Brussels.
Latest update concerning what is going on in Europe.
http://globaleconomicanalysis.blogspot.com/2011/11/france-germany-have-intense.html
It seems to me that there will be a new EU Treaty.
(amazing how the idiots who brought us into this mess, have decided that the problem is not enough EU Treaties…).
The usual scenario of an EU Referendum with an engineered result “scare the shite out of the voters, when the voters are ‘ready’….” (i.e. when the people are prepared for it by the media saturation propaganda).
It seems the Euro is taking longer to die than Cleopatra. In my view the sooner it goes the better and we can all move on .The question is what with ? I am not sure a return to multiple national currencies would be the best option. Rather a block currency covering Ex Euro zone states within certain credit brackets. In other words a grade one two and possibly three Euro or out;with fixed exchange rates, To replace three.All administered by the ECB. It would be up to the participating states to prove to the ECB that they qualified for… Read more »
The politicians will find some way to extend the sick patients life beyond Xmas. Politicians have an amazing way of keeping their vested interests alive and well. They will come out with more rubbish like the Greece deal and the leveraged bailout fund. Our great leaders might agree to sell Donegal to China for a hundred years. The chinese build a nice airbase there and we get €100 billion in exchange. Hell even pretending to do so might get the USA worried enough that they would print us a $100 billion to keep china out of europe. All I am… Read more »
Since the inception of the Euro project, Ireland has been useful as a pawn. A ‘hedge’ deployed by the Anglosphere dominions of Wall Street and The City of London: just in case the Franco-German Europa Dominion Project worked. As events unfold, Ireland faces an existential dilemma. Two choices seem possible. Continue to bail out miscreant international banker/developer classes by deflation/internal devaluation. A decade long Depression could allow Ireland to join whatever Germany allows to emerge from the current chaos. There will be some ‘Germanic Neu-Euro sound money project’. This option would mean shafting the US/uk creditor classes. Alternatively, default from… Read more »
The more this debacle continues, the greater my admiration for small economies who stay outside of the EU, and who manage their affairs, dilgently, resourcefully and carefully. And free of all the Bullshit of all these conferences, gimicks, and manovring.
I am also realising that Michael O’Leary was correct when he stated that we lost our sovereignty when we binged on borrowed money, in gradually increasing cycles between 1994 and 2008, and especially the mad years when Cowen was Minister for Finance.
It has been my view for the last fifteen years that the politics of ‘social democracy’ would result in the failure of the EU project. Democracy can only function within a constant stream of capital to tap into. In Europe we are now going through a change where the availability of money to fund the type of politics that got us here will no longer be available. Everyone is talking about Greece, Ireland and now Italy, will the Euro collapse, devaluation of the currency, etc. No one is looking at the elephant in the room! This crises is causing an… Read more »
Watch out for rhetorical changes in the public theater! When the german parliament voted on the EFSF, the next increment in the Lego tool box of risible politicians to deal with this crisis, Angela Merkel held a speech. It was in this speech that she raised her wimpy voice a little bit, in contrast to her usual emotionally detached way of speaking, and made a statement that echoed in my ears for a few days. Since the better part of 1.5 years I call these people Incrementalists, the fanatical worshippers of a currency that is now being promoted and equalized… Read more »
More on coup d’état…
G-Pap goes, L-Pap comes…. conveniently, the ex Vice of ECB. Remember when Klaus Regling was planted for a few weeks into the DoF, allegedly to head up the investigation into banking matters, a three man team? His job was of a different kind, very different in deed!
Yesterday I was driving and saw not one but two very large lorries displaying ‘ Shredding Experts ‘, These lorries were mighty big .
My minds went back to the NIB Bank Scandal .Should I be thinking something else to happen and where ?
Latest news on difference costs between France and German 10 year bonds plus the Political interference by Franco German leaders in elected governments in Greece and Italy being told by the 2 largest Euro Currency governments to change the elected participants and avoid any public referendum in Greece has shown European citizens once and for all the so called equal nations in the EU is a fallacy.New announced Greek PM Papademos Greek leader was the person who had brought Greece into the Euro as the countries Greek Finance minister in the first place may appear very strange move because such… Read more »
Here’s another interesting article to remind us how much of the Eurozone’s current problems were baked-in when Maastricht was signed… http://www.foreignaffairs.com/articles/66754/mary-elise-sarotte/eurozone-crisis-as-historical-legacy?page=show IMHO, German commitment to EMU and wider-European acceptance of German reunification were part of a single faustian bargain in 1992. The design of the currency and the bank’s role were just details to be worked out over time. If the system had weaknesses, future crises and their responses could only strengthen the integrationist agenda. Except… no one expected a financial crisis this large… or bailout fatigue in Germany after 20 years of paying for re-unification… or Franco-German leaders woefully… Read more »
David, Heiner Flassbeck made it very clear on Saturday
night that Germany will hold out against the ECB printing money and hell, you and the others didn’t half put pressure on him a number of times.
Great event,very informative and a nice succinct format.
Well worth the trip.
Goethe gave us hope that even our present troubles will be met with due justice:
Ihr führt ins Leben uns hinein,
Ihr lasst den Armen schuldig werden,
Dann überlasst ihr ihn der Pein;
Denn alle Schuld rächt sich auf Erden.
You lead us into life,
You let the poor be guilty
Then you let him through the pain;
For all guilt is avenged on earth.
As someone who abandoned Ireland some time ago I wish to comment. Why all the doom & gloom & austerity talk? Ireland is a great place, full of smart creative people, why continue on like this? The gombeen politicians got Ireland into this, why are they still running the place? The time has come for a sea-change. Europe is broke, unfixable, stuffed. Ireland, dump your gombeen men, dump the euro, introduce a new Irish Republic Currency and make sure you call it something funny, hold a competition to find a name. Create a pseudo-fiat currency, not something that can be… Read more »
Coup d’état continues to unfold in Italy…. Mario Monti
Coup d’état – “A coup consists of the infiltration of a small, but critical, segment of the state apparatus, which is then used to displace the government from its control of the remainder” This will be very short and crisp! ROMA, what an amazing place that city is, and just as my own hometown, Colonia Claudia Ara Agrippinensium, Cologne, where the Carnival festivities are launched today at 11:11AM, and in a coup d’état women are capturing the city council and declare Carnival, both these cities span around 2500 years of history! Whether you are a religious person or not, you… Read more »
Bloody Heavy Rain This morning I arrived to the office car park under the deluge of very heavy rain in the darkness .It was a scene from Angelas Ashes .I had with me ‘ soft tissue toilet paper unwrapped ‘ .The idea was to bring it into the office.I sat in the car unsure how to get out or what my strategy would be to get it safely inside and to avoid the rain .I turned off the car engine and waited and listened to the heavy rain pounding heavy on the car making its own loud music like cymbals… Read more »
Greek deposit ratio.
And European leaders of the generation that knew it all, going to Beijing for a bit of “beg-baby-beg”.
http://globaleconomicanalysis.blogspot.com/2011/11/world-has-major-funding-gap-imf-begs.html
The EU, and the entire culture connected with it, is in complete denial of some very obvious practicalities. These clowns are used to lecturing everybody in Europe on how to rule every minute aspect of their lives, and now they are begging the Chinese, who already supply them with underpriced manufactured goods for a digout.
France, and that AAA rating. France is a state system that is in denial – and we can tell this by the machinations of Sarkozy, with respect to the PIIGS. The classic example being the way Ireland will have to pay the unsecured bonds to the French FIRE sector institutions, and the way that the Irish media has so little to say about it. http://globaleconomicanalysis.blogspot.com/2011/11/france-new-elephant-in-room.html I can see France losing it’s Triple A rating very quickly. Also there are new competitors to the Rating Agency game, who are not as pliable as the established firms. One of these is based… Read more »
Barroso, as usual, rolling out the scare mongering, to keep everybody compliant with an austerity regime that is a facade, and which is only designed to make an unsustainable bailout of failed gamblers look harmless.
http://www.telegraph.co.uk/finance/financialcrisis/8846201/Debt-crisis-live.html
I have just realised that almost everything since the Treaty of Maastricht in Europe has enable a corporate takeover by big finance.
There are strong similarities with the ERM crisis in the early 1990s and the current crisis.
1900 billion of debt. Who is running this country. Are we actually paying these people to run up this debt. I thought people like Kevin Cardiff only existed in Ireland. It seems like Italy has loads of those lads. Did these guys pass leaving cert maths or is that not part of the actual brief. When I see that guy Berlisconi I see a man that is more at home in Las Vegas or Hollywood. Maybe he could go on a world tour with Def Leopard I hear there is a lot of parties etc. I cannot believe the guy… Read more »