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With stocks in Europe attempting a modest relief rally after yesterday’s sharp selloff, traders remain on edge over political developments as today is the deadline for Italy’s cabinet to resubmit their budget proposal after the EC requested a new fiscal plan. Virtually nobody expects any material changes, especially with Il Sole reporting this morning that Italy will maintain its 2019 deficit target at 2.4% of GDP and could alter the 2019 GDP growth rate of 1.5%

When looking at next steps, Deutsche Bank economists yesterday concluded that as contagion has been relatively limited for now, the commission will continue to adopt a tough stance on Italy, and it now seems inevitable they will recommend an Excessive Deficit Procedure (EDP) in the next few weeks.

And speaking of Deutsche Bank, the German lender’s Head of Research and Chief Economist David Folkerts-Landau penned a hard hitting Financial Times op-ed on the Italian situation, whose argument is that Europe must cut a grand bargain with Italy and that another costly sovereign debt crisis is inevitable unless the confrontational approach of the EC gives way to greater co-operation. According to Landau, Italy has actually been a frugal member of the single currency with a cumulative primary surplus every year outside of the GFC. However, these surpluses have simply helped finance the interest on the legacy debt and debt/GDP has still climbed. Meanwhile, the associated spending cuts and austerity required to run a primary surplus have lowered the standard of living for the population and led us to the political situation we find ourselves at today. What is his proposal?

The only viable option left is to reduce Italy’s debt service payments. This would create room to increase spending to modernise its economy without increasing the deficit and debt.

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

Italian Banks On Verge Of New Crisis After €400 Million Hole Emerges At Banca Carige

November 12, 2018

Italian Banks On Verge Of New Crisis After €400 Million Hole Emerges At Banca Carige

Remember the Italian “doom loop”?

Two months ago we reported that during the first Italian bond market freakout this May over the ascent of the populist due of Salvini-Di Maio to the Italian throne, Italian bank holdings of domestic government bonds rose by a record €28.4bn, more than what was seen during the peak of the European sovereign debt crisis of 2012. Visually, this is what the single biggest month of Italian bank purchases of BTPs in history looked like.

This vicious circle of Country X banks (in this case Italy) buying Country X bonds during times of stress – with the ECB’s trusty backstop – had for years been Europe’s dreaded sovereign bank doom loop. And, as Italy clearly demonstrated, repeated and aggressive attempts by European regulators and policymakers to finally break the “doom loop”, most recently with the introduction of the 2014 BRRD directive, which sought to remove the need for and possibility of bank bailouts, and instead ushered in bail ins, had been an abject failure.

On Monday traders got a harsh reminder of this when Italian banks came under renewed market focus, and selling, due to their inflated holdings of the country’s government bonds whose value has tumbled since May – just as they doubled down on their BTP purchases.

This time, the epicenter of the bank rout was Banca Carige, Italy’s last remaining large problem bank; weakened by years of mismanagement and shareholder infighting, it has fallen behind in the restructuring process that has seen rivals shed bad debts in the past two years. And according to Reuters, healthy Italian banks will be needed to help fill a €400 million hole on Banca Carige’s balance sheet “in order to avert a possible crisis that would further destabilize the sector.”

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

With Looming Deadline Italy’s Populists Defy EU, Warn Of “Suicide”, “Massacre” For Italy

November 12, 2018

With Looming Deadline Italy’s Populists Defy EU, Warn Of “Suicide”, “Massacre” For Italy

After the latest GDP data showed that Italy’s economy didn’t grow at all during the third quarter amid a spreading European slump that’s likely inspiring panic in Brussels, the country’s emboldened populist leaders are refusing to surrender in what has become a political game of chicken with the EU over a proposal that calls for an expansion of Italy’s budget deficit to 2.4% to fund pension benefits, welfare programs and tax cuts.

Ahead of a Tuesday deadline to resubmit its budget proposal, which Brussels rejected last month, Italian Prime Minister Giuseppe Conte was said to be holding a last-minute meeting with the two men who are really running Italy, Deputy PM’s Matteo Salvini, of the anti-immigrant La Lega, and Luigi Di Maio, of the anti-establishment Five Star Movement where, according to local media reports, they were expected to – paradoxically – discuss lowering the country’s growth forecast from 1.5% to 1.0-1.2%% in order to get a budget deal (it wasn’t immediately clear how expecting even slower growth would bolster their case).

However, while Salvini reportedly had a “positive” meeting with Conte on the budget, Di Maio reportedly skipped that meeting and, in a series of interviews given Monday and Sunday, the M5S leader appeared to dig in his heels, telling reporters at Montecitorio that giving up on the populist government’s fiscally stimulative agenda would be tantamount to economic “suicide” that would likely bring about a recession, according to Italian newswire ANSA.

“The only way to respect EU parameters is to make a suicidal budget law that would bring on a recession,” newswire Ansa cites Italy Deputy Prime Minister Luigi Di Maio as saying. Di Maio said he was agreeing with comments from Finance Minister Giovanni Tria.

…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…

Fitch Warns Italy’s Government May Not Survive Amid Calls For A Vote Of Confidence

November 6, 2018

Fitch Warns Italy’s Government May Not Survive Amid Calls For A Vote Of Confidence

Update: Picking a perfect moment to prove Fitch’s point, Bloomberg reports that the Italian government may call a vote of confidence in the Senate on the migration measures. This would aim to strong-arm Five Star dissenters who face expulsion from the party if they vote against the government.

Additionally, Five Star and the League are also at loggerheads in the lower house of parliament over Five Star’s demand in an anti-corruption bill to scrap time limits on how long people can be prosecuted after an initial trial. Salvini has said the government must “avoid trials that last forever, also for the innocent, which would be a defeat for everyone.”

It appears that if the internal bickering within Italy’s “coalition” government continues, the EU may just opt to wait to discuss the Italian deficit with whatever government comes as a replacement.

* * *

While European bond traders have been focused on the escalating standoff between Italy and Brussels over Italy’s budget-busting deficit proposal, which culminated this morning with EU’s Dombrovskis warning that the European Commission is considering a sanction procedure against Italy if the budget does not change – even as Italy has sternly refused to change the budget – this morning the head of Fitch’s sovereign ratings, James McCormack, warned that uncertainty involving Italy’s coalition government is as great a risk for BTP investors as the budget for the simple reason that the government may not survive as its members are “too different.”

Speaking on Bloomberg TV, the Fitch strategist said that there are not many things that the coalition partners agree on, and that raises questions about the government’s survival.

“We are not convinced that this coalition government is actually going to survive. It has very different coalition partners” and there are “not many things that they agree on”, McCormack said.

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

The Italian people must understand that their country is at war

November 6, 2018

The Italian people must understand that their country is at war

The conflict between the European Union and Italy is a full-blown financial war. Euro countries cannot print their own money and for that reason they cannot have an endless deficit. Countries within the eurozone have to live within their means or else, without the intervention of the ECB, they will go bankrupt. Nobody knows the consequences of an Italian default and debt restructuring, but it can lead to the end of the euro.

To make the euro sustainable, the European financial elites want the Italians to reduce their spending and turn a budget deficit into a budget surplus. However, due to the country’s shrinking population the Italian budget deficit — as we have argued many times – can only increase. The European commission rejects the Italian budget because Rome wants to increase its debt far beyond the limit allowed by the ECB. “This is the first Italian budget that the EU doesn’t like,” wrote Deputy Prime Minister Luigi Di Maio on Facebook. “No surprise: This is the first Italian budget written in Rome and not in Brussels!”¹⁾Matteo Salvini added: “This (the rejection of the Italian budget plan by the EU) doesn’t change anything.”. “They’re not attacking a government but a people. These are things that will anger Italians even more,” he said.²⁾

The country has entered a demographic winter³⁾and sustainable economic growth is simply impossible, at least for the foreseeable future. As is the case with the whole of Europe, the continent needs a plan to support an ageing and declining population. As if not aware of it, the Brussels-Frankfurt establishment only wants Italy to stick to their austerity program, i.e. decrease public spending and do away with the current Italian administration, which refuses to comply.

…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…

The Consequences of System Failure

October 30, 2018

The Consequences of System Failure

In short, every major political institution has been increasingly discredited as Brazil has spiraled deeper and deeper into a dark void. And from the abyss emerged a former army captain and six-term congressman from Rio de Janeiro, Jair Bolsonaro, with the slogan “Brazil above everything, God above everyone,” and promises to fix everything with hardline tactics.

– From today’s Intercept article: Jair Bolsonaro Is Elected President of Brazil. Read His Extremist, Far-Right Positions in His Own Words.

It’s been only a little over two years since the people of Great Britain surprised the world by voting to leave the European Union. Just a few months later, this nascent trend of political shock continued with the election of Donald Trump.

This tectonic shift toward political upheaval has continued to spread throughout much of the world, with Italy and Brazil being two more recent examples. That something very major and very global is happening is undeniable at this point, yet everyone seems to have their own pet reasons for why it’s occurring. I continue to stick to the same thesis I’ve had for nearly a decade, which is that the dominant global economic/financial paradigm led and managed by the U.S. has failed and is experiencing a slow, painful and dangerous death.

This reality was temporarily papered over by the shady and extremely corrupt financial bailouts of a decade ago. An event that focused all government resources on rescuing the already rich and powerful, while keeping bank executives out of prison.

They claim they “prevented another Great Depression.”
In reality, they just bailed themselves out and created the wild political environment we have today.

2:01 PM – Oct 29, 2018

Ten years ago, all of America’s resources were irresponsibly and aggressively marshaled toward the sole purpose of resuscitating a dead system and keeping it on life support.

…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…

Europe’s self-destructive war on Italy

October 29, 2018

Europe’s self-destructive war on Italy

Illustrated | SERGEI CHIRIKOV/AFP/Getty Images, ANDREAS SOLARO/AFP/Getty Images, ALBERTO PIZZOLI/AFP/Getty Images

Italy and the European Union are headed for a throwdown. Italy’s new government wants to help its citizens following years of grinding economic immiseration. And the EU is hellbent on stopping them, all in the name of neoliberal budget discipline.

It’s an astonishing spectacle, one that exposes the bottomless stupidity and self-destructive high-handedness of EU leadership.

Italy was hit hard by the global economic collapse of 2008 and the ensuing eurozone crisis. Italy’s unemployment rate peaked at 13 percent, and after years of suffering under EU-imposed austerity measures, Italy’s unemployment is still hovering around 10 percent. Not surprisingly, Italians finally got fed up with this state of affairs; in June, they revolted by electing an oddball coalition of left-wing and right-wing populists to run their government.

That new government promptly proposed an ambitious national budget, including a guaranteed minimum income, cancellation of planned cuts to Italy’s public pension system, a bevy of tax cuts, and more. Needless to say, this massive spending package, along with reductions in tax revenue, would require bigger deficits. Italy projects a gap between spending and tax revenues of 2.4 percent of GDP in 2019.

Why do this? Quite simply, the Italian government wants to cut poverty and offer its citizens some help as their economy continues to trudge along. But it’s also sound macroeconomic policy: With unemployment at 10 percent and GDP falling — from almost $2.4 trillion in 2008 to $1.9 trillion today — Italy is clearly suffering from a big shortfall in aggregate demand. The way to fix that is for the government to spend more than it taxes; specifically, to spend on programs that get money into the hands of consumers. Italians would subsequently spend that extra money, which in turn would create more jobs.

The European Union’s technocratic overlords are not in favor of this plan, to put it mildly.

…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…

By Going Nuclear the EU Has Already Lost Its Battle with Italy

October 23, 2018

By Going Nuclear the EU Has Already Lost Its Battle with Italy

“Here’s where we hold ’em by the nose, and kick ’em in the ass”
— Patton

If you ever want to know who’s losing an argument simply look at who’s doing the most threatening.

Not who’s shouting the loudest or who’s the angriest, but who is threatening.

Those who threaten are doing so because they feel their power is, itself, under attack.

It doesn’t matter if it is an argument with your kids or a big, geopolitical disagreement, as I always say, he who goes nuclear is losing.

Now, you might think I’m talking about the U.S. and President Trump’s incessant financial bullying of allies and enemies alike. I am somewhat, but not primarily.

Because as important as Trump’s mad flailing to try and remake the U.S.’s trade position around the world is, it pales in comparison to the acute crisis brewing in Europe.

Yes, Europe is more important. Why?

Because the EU just went nuclear on Italy.

Former Dutch Minister of Finance and former President of the Eurogroup, Jeroen Dijsselbloem, went on CNBC on Friday to declare all-out financial war on Italy.

That’s the way Zerohedge put it.

As a ‘former’ big wig it was his job to go out and state the position of those currently in power who can safely hide behind his words.

And if you watch the clip from CNBC in the linked article you’ll note that CNBC excised the most important quotes, where Dijsselbloem threatened the Italians that no exit from the euro is on the table.

But, why would he say this when Italy hasn’t brought it up at all?

In fact, Italy’s leadership has been nothing but supportive of the European Project while standing firm on it adopting fairer rules for member countries.

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

A Storm is Brewing in Europe: Italy and Its Public Finances Are at the Center of It

October 22, 2018

A Storm is Brewing in Europe: Italy and Its Public Finances Are at the Center of It

Photo Source Giuseppe Milo | CC BY 2.0

Yet the problem with Italy is not the problem that the European Commission or financial markets see.

Rome is planning an expansionary budget – just what Italy needs and just the opposite of what Brussels and the financial speculators in the bond markets are expecting or demanding.

Brussels wants “fiscal consolidation”. That is, for Rome to reduce its deficit – the annual gap between spending and taxation – so it can start paying down its huge public debt, which is 131% of GDP, proportionately the highest in the euro zone after Greece’s.

The government of the League and 5-Star Movement has raised the target for next year’s deficit to 2.4% of gross domestic product. That is comfortably below the EU’s 3% ceiling, but up sharply from a targeted 1.8% this year, flouting EU rules which call on highly-indebted countries like Italy, to narrow the deficit steadily towards a balanced budget.

Rome’s budget includes a reversal of an increase in the retirement age enacted in 2011 by a previous Democratic Party Government. This is a genuinely progressive and an economically sensible move, as it should force employers to high more young people sooner, helping to reduce the 31% youth jobless rate.

The budget also contains a so-called ‘citizen’s wage’, aimed primarily at the young unemployed who currently have to rely on their families for financial support. Five Star leader Luigi Di Maio has said the proposed payment of up to 780 euros a month will “abolish poverty”. That’s hyperbole, but any attempt to cut the numbers, which have tripled in the last 10 years, while those in “absolute poverty” have risen to 5.1 million (or 8.4 percent of the population), has to be welcomed.

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

The European financial establishment has just declared war on Italy

October 21, 2018

The European financial establishment has just declared war on Italy

This week in a CNBC interview Jeroen Dijsselbloem, the former Dutch minister of finance who served as the President of the Eurogroup, declared war on the Italian government. The European financial establishment is prepared to destroy the banking system and cause the Italian economy to implode. Like a Mafia boss, Dijsselbloem warned that Italy could run into trouble if it does not comply with Brussels’ directives. Of course, his statement was cloaked in diplomatic language:

“If the Italian crisis becomes a major crisis, it will mainly implode into the Italian economy … as opposed to spreading around Europe,” he said. “Because of the way that the Italian economy and the Italian banks are financed, it’s going to be an implosion rather than an explosion.”

For a man of this format it is unusual to publicly expose Italy as a state in a weak negotiating position or try to act as a scaremonger. We have never seen anything remotely like that, so we think that the utterance could only serve the purpose of giving the green light to the financial markets to orchestrate an attack on Italian bonds so as to drive Italian yield up.

“And there is gonna be a role for the markets, I mean if you look at what Italy needs in funding next year alone we are talking about over 250 billion Euro, refinancing part of the stock of their debt and also, of course, these new spending plans. So markets will really have to look at that very critically.”

Italy’s situation is ‘pretty worrisome’: Dijsselbloem from CNBC.

He reminded the Italian government that Italian banks are a sitting target for the European financial authorities. In order to destabilize a country’s economy, one must break its backbone i.e. banks.

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

Moody’s Cuts Italy’s Debt Rating To One Notch Above Junk

October 19, 2018

Moody’s Cuts Italy’s Debt Rating To One Notch Above Junk

Moody’s Investors Service has today downgraded the Government of Italy’s local and foreign-currency issuer ratings to Baa3 from Baa2. The outlook on the rating has been changed to stable, meaning that any downgrade to junk – the worst case scenario – has been taken off the table for the time being.

Moody’s also downgraded to Baa3 from Baa2 the local and foreign-currency senior unsecured bond ratings. The foreign-currency senior unsecured shelf and MTN ratings were downgraded to (P)Baa3 from (P)Baa2. Italy’s local-currency commercial paper rating and foreign-currency other short-term rating were downgraded to P-3/(P)P-3 from P-2/(P)P-2. The rating outlook is stable.
The key drivers for today’s downgrade of Italy’s ratings to Baa3 are as follows:

1. A material weakening in Italy’s fiscal strength, with the government targeting higher budget deficits for the coming years than Moody’s previously assumed. Italy’s public debt ratio will likely stabilize close to the current 130% of GDP in the coming years, rather than start trending down as previously expected by Moody’s. Moreover, the public debt trend is vulnerable to weaker economic growth prospects, which would see the public debt ratio rise further from its already elevated level.

2. The negative implications for medium-term growth of the stalling of plans for structural economic and fiscal reforms. In Moody’s view, the government’s fiscal and economic policy plans do not comprise a coherent agenda of reforms that will address Italy’s sub-par growth performance on a sustained basis. Following a temporary lift to growth due to the expansionary fiscal policy, the rating agency expects growth to fall back to its trend rate of around 1%. Even in the near term, Moody’s believes that the fiscal stimulus will provide a more limited boost to growth than the government assumes.

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

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