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I was looking forward to chilling with family and friends in Sydney this New Years Day, but Phil Dobbieruined it for me with this tweet:

I had forgotten that this was the 20th anniversary of the start of the Euro. But the Eurocrats in Brussels hadn’t. Some hours before the New Year commenced, Juncker and friends put out a press release extoling the virtues of the Euro. Virtues such as “unity, sovereignty, and stability … prosperity”.

Well so much for New Year cheer. With this one tweet, the EU put 2019 on track to be even worse than 2018. Using anyof those words to describe the Euro—apart perhaps from “unity”, since the same currency is used across most of continental Europe now—is a travesty of fact that even Donald Trump might baulk at.

Sovereignty? Tell that to the Greeks, Italians or French, who have had their national economic policies overridden by Brussels. Stability? Economic growth has been far more unstable under the Euro than before it, and Europe today is riven with political instability which can be directly traced to the straitjacket the Euro and the Maastricht Treaty imposed. Prosperity? Let’s bring some facts into Juncker’s fact-free guff.

I’ll start with Phil’s point about Greece. Greece’s GDP has fallen at Great Depression rates since the Eurozone imposed its austerity policies on it, and nominal GDP today is more than 25% below its peak.

Figure 1: Greek GDP and economic growth rate

Now of course that could be blamed on the Greeks themselves, so let’s look compare economic growth in the entire Eurozone to the USA (minus Ireland and Luxembourg, since in the former case their data is massively distorted by data revisions, and the latter has highly volatile data as well, and is so small—under 600,000 people—that it can safely be ignored).

Figure 2: Real economic growth rates

…click on the above link to read the rest of the article…

The Brewing European Debt Crisis

December 14, 2018

The Brewing European Debt Crisis

Macron is pushing for the European Finance Minister to raise money by selling EU bonds and then distribute the money to the 19-member Eurozone. France is very heavily indebted and here once again we have simply the goal to raise more money rather than reform. Because of the riots in France, Macron is trying to get the EU to fund France. They want to call this the European Monetary Fund and it would be pitched as stabilizing the Eurozone, but in reality, it is circumventing the austerity principles and budget constraints.

Juncker was the European Finance Minister to chair a body of European Finance Ministers from each member state. He would also become the Vice President of the European Union.
Juncker is seeking to use the European debt crisis that is brewing as the means to the ends resulting in the final federalization of Europe. If the EU raises the money and hands it out like welfare to the states, then they become addicted and totally dependent upon Brussels and thus eventually all sovereignty is surrendered.

This new European Monetary Fund would incorporate the European Stability Mechanism (ESM) which is a Luxembourg-based fund that lends money to states in crisis. They lent money to Cypris, Greece, Ireland, Spain, and Portugal. They were issuing their own debt but were not an EU entity. The ESM capitalization was guaranteed by the euro countries. Therefore, the proposal is really a takeover and it would be a way to funnel money to states such as France.

The Big Bet Against Italian Banks

November 23, 2018

The Big Bet Against Italian Banks

The eurozone’s third-largest economy, Italy, is marooned in a deep political and economic crisis, with seeming endless problems: an economy that has barely grown in decades, sky-high unemployment rates, ballooning national debt, an inability to form a stable coalition government and, lately, a looming showdown with the EU over mounting debt.

These have precipitated a wave of populism that has rejected the old establishment and brought in a new guard.

Unfortunately, that has done little to resolve another Italian bugaboo: a massive banking crisis.

European banks have accumulated about $1.2 trillion in bad and non-performing loans (NPLs) that have continued weighing down heavily on their balance sheets. Italian banks are sitting on the biggest pile of bad debt: €224.2B ($255.9B), with NPLs and advances making up nearly a quarter of all loans.

As if that is not bad enough, the banks now have to contend with potentially heavy penalties coming from Brussels after Italy’s recalcitrant leadership refused to revise the country’s fiscal 2019 budget to lower debt and borrowing.

The sharks can already smell the blood in the water, and investors have been shorting Italian banking stocks to death. Italian banks hold nearly a fifth of the country’s government bonds.

(Click to enlarge)

Source: Bloomberg

(Click to enlarge)

Source: Reuters

Short sellers have mainly been targeting medium-sized lenders as well as asset manager Banca Mediolanum and investment bank Mediobanca. According to FIS Astec Analytics data, the volume of these banks’ shares on loan—a good proxy for short interest—has shot to its highest in 15 months.

Short interest on Mediolanum’s shares now stands at 8.7 percent of outstanding shares, while Mediobanca has 15 percent of its shares sold short.

Rome Refuses To Back Down

…click on the above link to read the rest of the article…

The Eurozone Banks’ Trillion Timebomb

November 19, 2018

The Eurozone Banks’ Trillion Timebomb

Eurozone banks have fallen dramatically in the stock market despite the results of the stress tests carried out by the ECB, and the EU Banks Index is down 25% on the year despite year-long bullish recommendations from almost every broker. This should not surprise anyone because we have seen in the past that these tests are only a theoretical exercise. Moreover, stress tests’ results are widely challenged, and rightly so, because the exercise starts with the most ridiculous premise in economics: Ceteris Paribus, or “all else remaining equal”, which never happens. Every asset manager knows that risk builds slowly and happens fast.

Disappointing earnings, rising risk in the eurozone as well as in their diversification markets such as emerging economies, weak net income margins and low return on tangible equity are factors that have contributed to the weak performance of European banks. Investors are rightly suspicious about consensus estimates for 2019 with expectations of double-digit EPS growth rates. Those growth rates look impossible in the current macroeconomic scenario.

Eurozone banks have done a good job of strengthening their capital structure, reaching almost a one per cent per annum increase in Tier 1 core capital. The question is whether this improvement is enough.

Two factors weigh on sentiment.

. More than EUR104 billion of risky “hybrid bonds” (CoCos) are included in the calculation of core capital.

. The total volume of Non-Performing Loans across the European Union is still at around EUR 900 billion, well above pre-crisis levels, with a provision ratio of only 50.7%, according to the European Commission. Although the ratio has declined to 4.4%, down by roughly 1 percentage point year-on-year, the absolute figure remains elevated and the provision ratio is too small.

…click on the above link to read the rest of the article…

Europe In Panic Mode Over Economy As USA Soars

November 11, 2018

Europe In Panic Mode Over Economy As USA Soars

The eurozone’s economic growth rate has slumped to a four-year low.

The eurozone could not borrow from the momentum of the U.S. economy in the third quarter as economic growth slumped to a tepid 0.2%, the slowest rate in more than four years. With the 19-nation currency bloc beginning to stagnate, and the heavyweights failing to post significant gains, Brussels is in panic mode, likely leaning on the European Central Bank (ECB) for further stimulus.

Economists originally anticipated growth of 0.4%. But global trade woes, tumbling business confidence, Italian distress, and the gradual dissipation of an accommodative monetary policy all contributed to the poor numbers in the July-September period.

…the eurozone is not prepared to contain a new financial crisis…

Italy fell into stagnation, failing to record any growth. Rome has been contending with a debt crisis, sending the yield (interest rates) on government bond prices higher. Officials are embroiled in a contentious battle with the EU because their borrowing plans violate the trade bloc’s rules. There is now talk of a Keynesian-style fiscal stimulus to rev up the national economy.

France, which endured a terrible first half, reported a 0.4% increase, lower than the market forecast of 0.5%. The economy gained on surging business investment, household consumption, and net trade. While the figures are commendable, French Finance Minister Bruno Le Maire did not help matters when he suggested that the eurozone is not prepared to contain a new financial crisis, adding that “it is in no one’s interest that Italy be in difficulty.”

Germany, the economic engine of the eurozone, will not publish its Q3 numbers until mid-November. But the Bundesbank has warned that growth might have flat-lined in the previous quarter. Researchers do predict a recovery for Berlin in the final quarter of 2018, driven by a resurgence in the automobile sector and falling unemployment.

…click on the above link to read the rest of the article…

How Italy Leaves the Eurozone, Step by Step

November 9, 2018

How Italy Leaves the Eurozone, Step by Step

Earlier today, Italy told the EU where to go with it budget demands. Expect the EU to huff and puff.

The EU demands Italy do something about its buildup of debt. In response, Italy dismisses ‘implausible’ EU forecasts, says budget is sound.

“There are no grounds for questioning the soundness and the sustainability of our reforms,” Prime Minister Giuseppe Conte said in a statement. “For this reason we consider any other type of scenario for Italy’s public accounts to be absolutely implausible.”

If Italy does not budge, the Commission could launch an “excessive deficit procedure” that could eventually result in fines, though these have never been levied on any country in the monetary union.

“The European Commission’s forecasts for the Italian deficit are in sharp contrast to those of the Italian government and derive from an inaccurate and incomplete analysis (of the budget),” said Economy Minister Giovanni Tria.

“We regret to note this technical slip on the part of the Commission, which will not influence the continuation of constructive dialogue with (it).”

Excessive Deficit Procedures Coming Up

Mercy, that sounds ominous, but I cannot any concrete example of the EU ever doing anything.

Reuters has a Factbox List of Key Dates, five of which have already passed with no consequences. Here are the remaining steps to laugh at.

Nov. 19: In the event its budget were rejected by the Commission, the Italian government would have three weeks from the date of the EU opinion to submit a revised budget.
Dec. 3: Monthly Eurogroup meeting.
Dec. 10: The Commission would have three weeks, likely until Dec. 10, from the submission of Italy’s amended budget to adopt a new opinion in which it would describe Italy’s overall budgetary position and its impact on the whole euro zone.

…click on the above link to read the rest of the article…

Why’s France so Worried about Italy’s Showdown with Brussels?

October 31, 2018

Why’s France so Worried about Italy’s Showdown with Brussels?

The French megabanks are on the hook.

France was just served with a stark reminder of an inconvenient truth: €277 billion of Italian government debt — the equivalent of 14% of French GDP — is owed to French banks. Given that Italy’s government is currently locked in an existential blinking match with both the European Commission and the ECB over its budget plan for 2019, this could be a big problem for France.

On Friday, France’s finance minister, Bruno Le Maire, urged the commission to “reach out to Italy” after rejecting the country’s draft 2019 budget for breaking EU rules on public spending. Le Maire also conceded that while contagion in the Eurozone was definitely contained, the Eurozone “is not sufficiently armed to face a new economic or financial crisis.” As Maire well knows, a full-blown financial crisis in Italy would eventually spread to France’s economy, with French banks serving as the main transmission mechanism.

France isn’t the only Eurozone nation with unhealthy levels of exposure to Italian debt, although it is far and away the most exposed. According to the Bank of International Settlements, German lenders have €79 billion worth of exposure to Italian debt and Spanish lenders, €69 billion. In other words, taken together, the financial sectors of the largest, second largest and fourth largest economies in the Eurozone — Germany, France and Spain — hold over €415 billion of Italian debt on their balance sheets.

While the exposure of German lenders to Italian debt has waned over the last few years, that of French lenders has actually grown, belying the ECB’s long-held claim that its QE program would help reduce the level of interdependence between European sovereigns and banks.

…click on the above link to read the rest of the article…

French FinMin: The Euro Zone Is Not Prepared To Face A New Crisis

October 29, 2018

French FinMin: The Euro Zone Is Not Prepared To Face A New Crisis

Europe finds itself at a troubling crossroads: while on one hand the official narrative emanating from Brussels and Berlin (and, of course, the ECB) is that there is no risk of contagion from Italy’s budget crisis in the European Union, on the other hand the euro zone is “not prepared enough to face a new economic crisis”, French Finance Minister Bruno Le Maire told daily Le Parisien on Sunday.

“We do not see any contagion in Europe. The European Commission has reached out to Italy, I hope Italy will seize this hand,” he said in an interview.

“But is the eurozone sufficiently armed to face a new economic or financial crisis? My answer is no. It is urgent to do what we have proposed to our partners in order to have a solid banking union and a euro zone investment budget.”

Le Maire’s remarks come just days after the European Commission rejected Italy’s draft 2019 budget earlier this week for breaking EU rules on public spending, and asked Rome to submit a new one within three weeks or face disciplinary action. And while Brussels officials said that Rome’s “unprecedented” standoff with Brussels seems certain to delay the reform process and probably dilute it for good, Italy has remained defiant and has repeatedly said it would not budge on its target deficit at 2.4% of GDP.

The standoff between Italy and the EU, and concerns about who will buy Italian debt after the ECB ends its QE at the end of the year, has sent Italian yields soaring to the highest level in nearly 5 years.

…click on the above link to read the rest of the article…

Eurozone will Collapse – There is No Other Choice Economically

October 26, 2018

Eurozone will Collapse – There is No Other Choice Economically

QUESTION: Mr. Armstrong; I can see what you have been arguing about the faulty design of the euro. After the EU rejected Italy’s budget, is there any hope left for Italy?

RS, Rome

ANSWER: For those who do not follow Europe closely, the European Union took the unprecedented step Tuesday (23rd of Oct) of rejecting Italy’s draft budget as incompatible with the bloc’s rules on fiscal discipline. This has simply validated the position many take in Italy that they are an occupied country. The Commission Vice-President Valdis Dombrovskis publicly stated that the Italian government was “openly and consciously going against commitments made” to drive down the country’s debt and deficit levels. The decision is escalating a battle between Europe’s establishment and Italians and the sooner you exit the Euro, the better Italy will survive.

From the outset, in designing the Euro they deliberately lied about just about everything. They told everyone that they would be paying the same interest rates because of the single currency. I explained that was absolutely false. They appear to have deliberately used the example of the dollar to pitch the euro but never mentioned that the single interest rate was the Federal level they were referencing. All 50 states issued their debt in the single currency of the dollar but they all paid rates according to their own credit rating.

I warned them that they MUST consolidate all the debts making that a national debt that they would have a single interest rate and that would compete with the dollar. Thereafter, each state would then issue its own debt as deeded and the free markets would price that accordingly. Under the system that I instructed them to adopt, this budget crisis would not exist.

…click on the above link to read the rest of the article…

Italy Openly Defiant of Eurozone Stability Pact, Deliberately and Knowingly

October 23, 2018

Italy Openly Defiant of Eurozone Stability Pact, Deliberately and Knowingly

Eurozone officials and the ECB are in a quandary over Italy’s deliberate defiance of budget rules.

There is a fundamental irony in Italy’s open defiance of Eurozone stability rules. Both France and Germany did the same in 2003.

Eurointelligence reports Italy Formulates First Fundamental Challenge to Reformed Stability Pact.

It is hard to concoct a more fundamental challenge to the European Commission’s authority than a member state announcing, like Italy did yesterday, that it is going to break the rules deliberately and knowingly. Such purposeful disregard threatens the whole rules-based edifice of the Commission’s authority, and ultimately treaty-based European integration.

In the current face-off between Brussels and Rome over Italy’s budget, a look back at the years 2003-2005 is as amusing as it is instructive. Then it was France and Germany that smashed the stability pact.

France and Germany argued at the time that the breach was temporary and that growth would resume later. Thos are exactly the arguments Italy makes today.

Interested parties may wish to read the November 26, 2003 Telegraph article France and Germany Smash Euro Pact.

The lead paragraph is amusing as are some further down the line.

The eurozone’s Stability and Growth Pact was effectively killed off yesterday when EU finance ministers refused to enforce treaty law against France and Germany for persistently breaching the spending rules.

France and Germany won backing for their “flexible” interpretation of the pact after a stormy exchange with smaller states. In the formal show of hands later, only Holland, Austria, Finland and Spain voted to uphold treaty law, although Belgium, Sweden, Denmark and Greece voted for a lesser condemnation.

If you seek further irony, it was Germany that demanded the pact in return for giving up the Deutsche Mark.

…click on the above link to read the rest of the article…

Italy’s Debt Crisis Thickens

October 19, 2018

Italy’s Debt Crisis Thickens

But outside Italy, credit markets are sanguine, and no one says, “whatever it takes.”

Italy’s government bonds are sinking and their yields are spiking. There are plenty of reasons, including possible downgrades by Moody’s and/or Standard and Poor’s later this month. If it is a one-notch downgrade, Italy’s credit rating will be one notch above junk. If it is a two-notch down-grade, as some are fearing, Italy’s credit rating will be junk. That the Italian government remains stuck on its deficit-busting budget, which will almost certainly be rejected by the European Commission, is not helpful either. Today, the 10-year yield jumped nearly 20 basis points to 3.74%, the highest since February 2014. Note that the ECB’s policy rate is still negative -0.4%:

But the current crisis has shown little sign of infecting other large Euro Zone economies. Greek banks may be sinking in unison, their shares down well over 50% since August despite being given a clean bill of health just months earlier by the ECB, but Greece is no longer systemically important and its banks have been zombies for years.

Far more important are Germany, France and Spain — and their credit markets have resisted contagion. A good indicator of this is the spread between Spanish and Italian 10-year bonds, which climbed to 2.08 percentage points last week, its highest level since December 1997, before easing back to 1.88 percentage points this week.

Much to the dismay of Italy’s struggling banks, the Italian government has also unveiled plans to tighten tax rules on banks’ sales of bad loans in a bid to raise additional revenues. The proposed measures would further erode the banks’ already flimsy capital buffers and hurt their already scarce cash reserves. And ominous signs are piling up that a run on large bank deposits in Italy may have already begun.

…click on the above link to read the rest of the article…

ECB Hands Italy An Ultimatum: ‘Obey EU Budget Rules Or We Won’t Save You’

October 11, 2018

ECB Hands Italy An Ultimatum: ‘Obey EU Budget Rules Or We Won’t Save You’

With the Washington Post stepping up to put a floor under US stocks Thursday afternoon by reporting that President Trump would meet Chinese President Xi Jinping at next month’s G-20 summit (while the headline soothed the market, it doesn’t change the fact that, as with everything involving the Trump administration, this too remains subject to change), investors have apparently overlooked the latest ominous headlines out of Italy. To wit, Reuters reported that the ECB won’t come to Italy’s rescue if its government or banks run out of cash unless the Italian government first secures a bailout from the European Union. Of course, this would almost certainly require that the populist coalition end its ongoing game of fiscal chicken with Brussels and abandon its dreams of lowering the retirement age and extending a basic income to the Italian people – policies that would effectively secure a political future for M5S and the League.

In effect, the ECB’s latest trial balloon is tantamount to blackmail: Either the Italians agree to fall back in line and obey European budgetary guidelines, or the central bank will sit back and watch as bond yields surge, providing the ratings agencies even more ammunition to cut Italian debt to junk – effectively guaranteeing a Greece-style banking crisis as the liquidity taps are turned off.

And to eliminate any lingering doubts that this was a deliberate coordinated leak, Reuters cited “five senior sources familiar with the ECB’s thinking,” many of whom were “present at the economic summit in Indonesia.” Of course, the ECB sources explained that they are merely acting in the best interest of the monetary union. Because if Italy is allowed to shake off the yoke of European austerity and re-assert its sovereignty, then what would stop Spain or Portugal from doing the same?

…click on the above link to read the rest of the article…

Lega Popularity Rises With Each EU Confrontation: Major Event Coming

October 11, 2018

Lega Popularity Rises With Each EU Confrontation: Major Event Coming

The EU conspiracy to oust Berlusconi succeeded because his popularity was on the skids. Lega is a far different story.

Eurointelligence has an interesting on rising Italian yields, Italy’s budget deficit, and the inability of the EU and ECB to do any thing about it.

One of the lessons of 2012 is that rising spreads in the eurozone can create a self-fulfilling dynamic once they breach a certain (unknown) level. For Italy, we don’t think spreads have reached that point at the current levels of just above 300bp. But another 50bp or 100bp could trigger a crisis. A rating downgrade is certain, but the markets are watching whether the downgrade will come with a stable or negative outlook. If it is negative, Italian bonds would be on the brink of losing their investment-grade status.

The nervousness is fuelled by defiant comments from Italian ministers. Paolo Savona said that, if the EU opts to reject the Italian budget, it will be up to the people of Italy to decide what to do next. This is where the situation today is so different from that of 2011 when an Italian president colluded with the ECB to remove Silvio Berlusconi. By then, Berlusconi had lost his majority in the chamber of deputies – and the support of the public at large. The Lega, by contrast, is currently seeing its support rise. And this continues with every row with the EU. It is therefore far from clear that a financial crisis would necessarily play into the hands of the EU and produce a more compliant Italian government, or at least a more compliant budget. The opposite might be the case. As of now, we see no signs of the Italian government backing down.

…click on the above link to read the rest of the article…

Trader: Italy’s Situation Is Truly Unprecedented

October 8, 2018

Trader: Italy’s Situation Is Truly Unprecedented

If Italy is going to avoid a full-blown euro zone debt crisis that’s capable of causing turmoil in global financial markets, communication will be key.

Much of the investor complacency toward the threat from Italy’s debt crisis is the fallacy that worse scenarios have been survived elsewhere before.

Let’s be clear: no country in history that doesn’t control its own currency has ever had such a large debt pile. This situation is unprecedented.

It’s also the debt-to- GDP ratio that makes it particularly dangerous. Some analysts have pointed to the fact that France has been running much larger budget deficits for years, but France is a far larger economy with a smaller debt burden. Its debt/GDP ratio is just below 100%; the equivalent metric for Italy is over 130%.

This isn’t to argue that disaster is inevitable. If Italy and the EU convey some sense of coordinated belief that Italy’s debt burden will ease in the years ahead, investors will then be inclined to give the country the benefit of the doubt, especially given the yields on offer.

But there’s no sign of compromise as the deadline for budget submission approaches and the threat of ratings downgrades loom ever closer. On the weekend, European Commission President Jean-Claude Juncker called on Italy to redouble its fiscal efforts; Di Maio responded by saying the country won’t retreat on its fiscal plans.

Unless the relevant officials start communicating in a more positive and coordinated fashion, then Italian yields will continue to spiral and contagion will spread.

Five days ago, I wrote that the Italian debt crisis had crossed the Rubicon. It was exactly five days after Caesar’s crossing in 49 BC that the leaders of the Roman Republic fled the capital rather than making any attempt to compromise with Caesar. For the sake of more than just the Italian bond market, let’s hope we see a much more constructive reaction from today’s Italian government.

Italy’s Debt Crisis Flares Up, Banks Get Hit, as Showdown with the EU Intensifies

October 7, 2018

Italy’s Debt Crisis Flares Up, Banks Get Hit, as Showdown with the EU Intensifies

Who will blink first?

A serious showdown is brewing in the Eurozone as Italy’s anti-establishment coalition government takes on the EU establishment in a struggle that could have major ramifications for Europe’s monetary union. The cause of the discord is the Italian government’s plan to expand Italy’s budget for 2019, in contravention of previous budget agreements with Brussels.

The government has set a public deficit target for next year of 2.4% of GDP, three times higher than the previous government’s pledge. It’s a big ask for a country that already boasts a debt-to-GDP ratio of 131%, the second highest in Europe behind Greece. To justify its ambitious “anti-poverty” spending plans, proposed tax cuts, and pension reforms, the government claims that Italy’s economic growth will outperform EU forecasts.

Brussels is having none of it. EU Commission President Jean Claude Juncker urged Italy’s Economy Minister Giovanni Tria to desist. “After having really been able to cope with the Greek crisis, we’ll end up in the same crisis in Italy,” he said. “One such crisis has been enough… If Italy wants further special treatment, that would mean the end of the euro. So you have to be very strict.”

On Wednesday ECB President Mario Draghi held a private meeting with Italian President Sergio Mattarella in Rome, at which he reportedly raised concerns about Italy’s public finances, the upcoming budget bill, and related stock-exchange and bond-market turbulence.

The meeting evoked memories of the backroom machinations that Draghi, together with his predecessor, Jean Claude Trichet, undertook to engineer the downfall of Italian premier Silvio Berlusconi in 2011 and his replacement with technocrat Mario Monte, after Berlusconi had posited pulling Italy out of the euro during Europe’s sovereign debt crisis.

…click on the above link to read the rest of the article…

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