As Spain falls Italy enters the crosshairs

darkman2

No, this ain't a look ahead to the Irish defeat of Spain on Thursday in Gdansk. Rather the Eurozone dominoes continue to fall. With Spain in the process of being dealt with and Cyprus expected to enter the elite bailout club within days attention of the market has quickly turned it's eye to Italy.


10 year yields today have soared to over 6%. It's all sell, sell, sell.


http://www.bloomberg.com/quote/GBTPGR10:IND/chart


How long do you reckon Italy will hold out?

liammur

darkman2 wrote: »

No, this ain't a look ahead to the Irish defeat of Spain on Thursday in Gdansk. Rather the Eurozone dominoes continue to fall. With Spain in the process of being dealt with and Cyprus expected to enter the elite bailout club within days attention of the market has quickly turned it's eye to Italy.


10 year yields today have soared to over 6%. It's all sell, sell, sell.


http://www.bloomberg.com/quote/GBTPGR10:IND/chart


How long do you reckon Italy will hold out?

It's the U.S I'm waiting for, then the fun will really start!

bbam

Ok am I right in thinking that the "markets" don't feel there is enough will or money available to support the countries in trouble? The PIIGS as they have so nicely been called.
Surely this was obvious before throwing 100billion into Spain. It's hard to believe that Germany (who run Europe ) can't see the problem isn't going away but instead spreading as feared.
Or, are the Germans happy to throw out loans to these countries as they will effectively have control over them going forward, could they be buying control of the weaker nations for when they come out and admit in public that the Euro currency needs to split.

I had relaxed my fears of a Euro split or currency change but now seeing it go on and on I again am worried where it's going.

Watching George Lee last might didn't cheer things up much either.

The Corinthian

The Eurozone crisis is made up of three principle issues. The first and most immediate was one of impending bankruptcy and this was dealt with through loans. The second was one of spending more than one can afford and this has been dealt with through cutbacks. Once these two were addressed we got a respite from the markets for the last few months.

The third question is the longer term ability for the various national governments to actually pay off these loans and debts and this is what is currently is making the markets jittery. This ability to raise funds is directly linked to tax revenue, which in turn is linked to GDP and that's where the problem lies.

If you compare Germany and Italy, you'll actually find that Germany is in far higher debt than Italy - indeed, Italy's debt has been pretty stable for the last decade. The difference is that Germany has a higher GDP, which means more tax, and in turn a greater ability to service or pay off her debts. Italy, on the other hand has been sluggish in this regards for years and now austerity is having the negative effect of contracting the economy.

As a result, the market's attention has turned away from controlling debt to promoting growth and the principle problem with this is you can't have both unless either the burden is spread out across the EU/Eurozone and/or the repayment targets are stretched into decades rather than a few years.

This is where the problem becomes political; Merkel is holding fast to keeping debts separate. As such she's rejected the Eurobonds concept (which would mean Germany would be liable for debts incurred by other European states, but would also mean that interest incurred would drop dramatically) as it would be wildly unpopular in Germany.

Meanwhile both the market and other states (not just European, but also the US) are increasingly demanding that policies like this are adopted, because without them, austerity cannot be loosened, recessions will continue, GDP will not grow (or will contract), tax revenue will fall and the capacity to repay or service debts will be put in doubt. The Economist is not a bad barometer on market thinking (regardless if you like its politics), has been calling on Merkel to pull her thumb out of her ass on this one.

Ironically, Germany is de facto liable for debts incurred by other European states; if Ireland or Spain were to default on debts to Germany, it would ultimately be Germany's problem anyway. And this is before one considers that damage to Germany's economy that such defaults would incur.

There appears to be a lot of brinkmanship taking place. Merkel needs to fashion a deal that will not damn her with the German electorate - or she may genuinely oppose such collective debt on principle (she's very fond of citing the virtues of thrifty Swabian housewives). Meanwhile, countries like Italy, Greece and Ireland are increasingly looking at the reality that austerity without growth is not workable in the long term. And outside the Eurozone, nations like the US and UK just want a solution and are beginning to side with the PIIGS nations and placing pressure on Germany.

The next six weeks are critical; what happens in Greece on the 17th may well force the issue. If SYRIZA win power, then this could lead to Greece's departure from the Euro. While Greece is not really that important economically, the psychological effect on the markets could be devastating and result in a domino effect on other nations - forcing them to default if bond rates start to hit double figures. If that happens, then Germany's GDP will end up taking a body blow within 18 months, and as her capacity to raise tax and service debt is hit, then she'll belatedly join the same club.

That's if nothing is done, of course. Something will be, which is why I think the issue will be forced before long, but it awaits to be seen what and whether it will be effective enough.

NIMAN

bbam wrote: »

Watching George Lee last might didn't cheer things up much either.

It was misery p0rn of the highest order.

The easiest kind of documentary to make.

Lantus

It's true that so many of the euro economies are just so different that a single currency would probably of never of worked. How can countries like Germany and Greece work off the same economic page? When you think about it it's stupid.

Every country bar France and Germany are potentially in the crosshairs so in that regard europe is allready broken.

The social cost of a euro breakup would be catastrophic. Blood would run in the streets of every major city in Europe. We would all go back at least 50 years in terms of economy, standards of living and health care.

Bizzarly it could be a stimulus for war between certain member states as instability and paranoia lead to rash and dangerous decisions being made in haste. The very thing the euro was designed to stop ever happening again it could end up eventually being a catalyst for.

There must be a way of Europe collectively getting rid of its debt. I mean its just a number on a computer somwhere. Do we control the monetary system or are we all slaves to it? If its the latter then Europe is essentially the biggest open air prison on planet earth and every yet unborn child will be born into a form of economic slavery that they can never escape. Its a bad sci fi movie gone horribly wrong.

Theres a fundemental question of why we are doing this (letting this happen?) to ourselves.

Franticfrank

I agree with you but what surprises me most is that we've all learned nothing from previous experiences. Surely they could have known better. Now this has happened and nobody has an idea what to do. At least German statistics show them to be pretty strong at the moment, but they they'll inevitably go down if all the major economies around them go down.

The Corinthian

Lantus wrote: »

It's true that so many of the euro economies are just so different that a single currency would probably of never of worked. How can countries like Germany and Greece work off the same economic page? When you think about it it's stupid.

It's, in the benefit of hindsight, true that a single currency would probably of never of worked in the way that it was set up.

The US Dollar works well, despite the economies of states such as California and Mississippi being vastly different. The Swiss Franc works well, despite the economies of cantons such as Zurich and Jura being vastly different. How they differ to the Euro is that they are ultimately underpinned collectively, whereas the Euro is sort of underpinned collectively, but when you come down to it, it's every man for himself - it's only as strong as the weakest link.

That's always been the problem with the EU; it's a compromise between federalist and nationalist aspirations and as a result you often get compromise positions that don't really work too well.

And that's what the current debate is about; underpinning the currency in a truly collective fashion, which would mean that nations such as Germany would end up having to guarantee some of the debts of nations such as Greece - just as California ultimately guarantees some of the debts of Mississippi and Zurich ultimately guarantees some of the debts of Jura.

Every country bar France and Germany are potentially in the crosshairs so in that regard europe is allready broken.

France is definitely marked for the cross-hairs, in the future. Germany, Austria, Luxemburg, Holland and a surprising number of east European Eurozone nations are still considered stable.

The social cost of a euro breakup would be catastrophic. Blood would run in the streets of every major city in Europe. We would all go back at least 50 years in terms of economy, standards of living and health care.

I'm not sure if that would be the case, although in a worst case scenario it would be close. Thing is we don't know quite how bad it will be, although even in the best case scenarios, it's going to be bad - especially for those forced out of the Euro.

Bizzarly it could be a stimulus for war between certain member states as instability and paranoia lead to rash and dangerous decisions being made in haste. The very thing the euro was designed to stop ever happening again it could end up eventually being a catalyst for.

I think you're getting a bit dramatic now. Europe managed to remain at peace for a long time before the Euro.

There must be a way of Europe collectively getting rid of its debt. I mean its just a number on a computer somwhere. Do we control the monetary system or are we all slaves to it?

Whether it's on a computer or on paper or in gold reserves one man's debt is another man's credit. This means that 'wiping' it is going to leave someone out of pocket and they won't like this.

When you stiff someone in business, suppliers stop supplying or demand COD payments or charge a premium because other suppliers think you're too much hassle to deal with. And the same thing happens on an international level.

Take a look at what the interest rates are for 10-year bonds for countries like Pakistan or Brazil and you'll feel better about what Ireland is paying. As for Argentina - they can't even sell on the open markets.

darkman2

Spain's cost of borrowing fast approaching 7%.

http://www.bloomberg.com/quote/GSPG10YR:IND/chart

The market sees that what's effectively happening is that Spain is taking another €100bn on to it's national debt. The so called "bailout" for Spain's banks has made the situation worse not better. I believe Spain will have to ask for a full sovereign bailout. It can't borrow at those sorts of rates for long.

kennyb3

The Corinthian wrote: »

That's if nothing is done, of course. Something will be, which is why I think the issue will be forced before long, but it awaits to be seen what and whether it will be effective enough.

What realistically can be done?

Eurobonds cant be introduced over night and there is nothing to say the yield on them wouldnt creep up without a 'functioning' Central bank.

ECB printing isn't an option given this would be electoral suicide for Merkel (elections September/October 2013).

The Corinthian

kennyb3 wrote: »

Eurobonds cant be introduced over night and there is nothing to say the yield on them wouldnt creep up without a 'functioning' Central bank.

They don't have to be; only the official intention to create them would be sufficient to calm the market long enough for them to be created. It would be the light at the end of the tunnel that they've been hoping for.

ECB printing isn't an option given this would be electoral suicide for Merkel (elections September/October 2013).

My guess is that it will, at best, have to be something akin to the above, but will be sold as something else that Joe Blogs (or Klaus Muller) is too illiterate to understand. Whether this occurs before or after a Greek default is another story - hopefully before, but it may take the start of a domino effect triggered by a Greek default to finally get people to agree.

kennyb3

The Corinthian wrote: »

They don't have to be; only the official intention to create them would be sufficient to calm the market long enough for them to be created. It would be the light at the end of the tunnel that they've been hoping for.

I guess we won't know if this will buy sufficient time if it does happen. It will be very interesting to see anyway.

As i've said previously I personally see no reason why the eurobond yield won't steadily creep upwards.

Maybe if both this and the policy below are implemented the focus will turn elsewhere. I remain to be convinced though.

The Corinthian wrote: »

My guess is that it will, at best, have to be something akin to the above, but will be sold as something else that Joe Blogs (or Klaus Muller) is too illiterate to understand. Whether this occurs before or after a Greek default is another story - hopefully before, but it may take the start of a domino effect triggered by a Greek default to finally get people to agree.

I would have thought the same prior to the internet age but now regular people even know the like of the LTRO was basically a form of backdoor printing.

The Corinthian

kennyb3 wrote: »

I guess we won't know if this will buy sufficient time if it does happen.

I'd be pretty confident that it would as it would eliminate almost all of the long term uncertainty. Of course, if it takes ten years to implement, you may have a point.

As i've said previously I personally see no reason why the eurobond yield won't steadily creep upwards.

What would ultimately happen is that the debt to GDP ratio for the combined Eurozone would fall significantly to what it presently is for of the PIIGS nations and rates would drop accordingly for them. Countries like Germany and Holland would end up the losers though, because theirs would rise.

Of course it could creep up again, but then again so can any bond rate, but it would be as a result of the combined Eurozone rather than the present situation whereby nations are judged individually and then the contagion turns investor attention to the next nation on the list.

I would have thought the same prior to the internet age but now regular people even know the like of the LTRO was basically a form of backdoor printing.

Just because people have heard a lot of terms doesn't mean they actually understand what they are beyond a superficial level. They probably would have stopped listening to 'media economists' a while back, and instead read the FT or Economist, if they did.

kennyb3

The Corinthian wrote: »

What would ultimately happen is that the debt to GDP ratio for the combined Eurozone would fall significantly to what it presently is for of the PIIGS nations and rates would drop accordingly for them. Countries like Germany and Holland would end up the losers though, because theirs would rise.

Of course it could creep up again, but then again so can any bond rate, but it would be as a result of the combined Eurozone rather than the present situation whereby nations are judged individually and then the contagion turns investor attention to the next nation on the list.

The problem is that even the German ratio about 85%, the french one is slightly more, the italian one is 120% and the spanish is heading north quickly (and exludes the provincial debt as well as the possible blackhole of their banks). I do realise that the dutch and austrian ones are lower but the above 4 are the 4 biggest economies of europe. Combining them all i'm guessing would leave a joint level somewhere around 90% (open to correction). They are all still rising at present so who knows where they might be in 5 years.

These are all miles north of their own 60% targets and compare them to norway, sweden and switzerland. Even the US is only 70%.

Thats basically my concern in the meantime. But i guess it might buy time and push the focus onto the UK which has a pretty high debt to GDP level.

And again the issue will be the timescale of the process, the possibility for further hiccups along the way. Will the markets be happy with a promise for something 5+ years down the line?

I guess we ll find out. Interesting times anyway. It's all fascinating.

stackerman

liammur wrote: »

It's the U.S I'm waiting for, then the fun will really start!

And the UK

The whole show is nearing that cliff

gold_bull

Lantus wrote: »

It's true that so many of the euro economies are just so different that a single currency would probably of never of worked. How can countries like Germany and Greece work off the same economic page? When you think about it it's stupid.

Every country bar France and Germany are potentially in the crosshairs so in that regard europe is allready broken.

The social cost of a euro breakup would be catastrophic. Blood would run in the streets of every major city in Europe. We would all go back at least 50 years in terms of economy, standards of living and health care.

Bizzarly it could be a stimulus for war between certain member states as instability and paranoia lead to rash and dangerous decisions being made in haste. The very thing the euro was designed to stop ever happening again it could end up eventually being a catalyst for.

There must be a way of Europe collectively getting rid of its debt. I mean its just a number on a computer somwhere. Do we control the monetary system or are we all slaves to it? If its the latter then Europe is essentially the biggest open air prison on planet earth and every yet unborn child will be born into a form of economic slavery that they can never escape. Its a bad sci fi movie gone horribly wrong.

Theres a fundemental question of why we are doing this (letting this happen?) to ourselves.

what makes you think a euro breakup would set the continent back fifty years ?

kennyb3

http://www.reuters.com/article/2012/06/12/us-eurozone-idUSBRE85B0FT20120612

Saying what everyone is thinking