Italy

After Berlusconi was scolded by everyone, but most importantly by backstop solvency provider ECB, for his bull in a China shop maneuver of the first, now defunct, Italian Austerity plan, here are the details from the next, soon to be gutted "Austerity", which readers may be forgiven, if they take it with just a grain of salt. According to Bloomberg, the details are as follows:

• Plan to to include higher retirement age for women from 2014
• To add 3% tax on income over 500k euros
• Italy to approve constitutional law for budget balance Sept
• To increase VAT from 20% to 21%.

Will anyone take this latest attempt to appease the ECB seriously? Of course not.In the meantime, Italy, as predicted - remember Piazza Navona strikecam and all that, and especially its workers, are not happy as protests proceed to engulf the country:

It is only a matter of time before France announces to little fanfare that its GDP is about to be slashed, and that as a result the rating agencies put it on downgrade review, and blowing up the entire EFSF mechanism. But before that one needs to shake out the weaker hands, like Italy. For better or worse, that just happened. From Reuters: "Italian economic growth is likely to fall short of the government's official forecast of 1.1 percent in 2011 and 1.3 percent in 2012, probably coming in under 1 percent, a senior government source said on Monday. "It will be very difficult for Italy to reach 1.1 percent growth this year and next," the official, who spoke on condition of anonymity, told Reuters." So if the raters needed any excuse to go ahead and downgrade Italy even more, this is it. As for France: we give them a few months before they also have to tell the truth, and face the music, although with French CDS once again trading at all time wides, the market is not waiting.

All eyes were on Italy early this morning when the country auctioned off €2.99 billion of 4.25% BTPs due July 2014 and €3.75 billion in 5% bonds due 2022, because the ECB, unlike in the secondary market, is not allowed to buy bonds at primary issuance. While it would have been unrealistic to expect a bond failure, the bond levels were watched very closely for signs of deterioration despite over €40 billion of SMP purchases by the ESB in the past 3 weeks. And judging by the reaction (+11 bps in the Italian Bund spread), the market was not very happy with the yields of 3.87% (4.8% previously) and 5.22% (5.77% previously) or the Bids to Cover of 1.32 and 1.27 on the 3 and 10 years, as both slipped following the auction in a market that was very disappointed to see a 5 handle yield on the 10 year. This has set a negative  tone to early European trading, with pronounced weakness across markets, and the EURUSD, which has dropped to under 1.44 overnight after trading in the 1.45's late last night. The concern is that even with the ECB buying debt in the secondary market (effectively monetizing), the tail is unable to wag the dog strongly enough, and if the EFSF is not activated soon enough, and expanded significantly, we expect to see the market test the ECB once again, and SMP purchases to soar very soon.

Italy's brief flirt with Austerity, disclosed on August 12, lasted all of 2 weeks. As Reuters reports, following a 7 hour meeting between FinMin Tremonti who has been portrayed by the media as the primary reason why Italy has recently become the target of bond vigilantes, and which in turn was forced to establish some token measures of austerity, and PM Berlusconi, the most provocative measure of the "austerity" packet have been dropped, namely the solidarity tax, which would see new taxes on high earners, as well as austerity imposed on local budgets, and instead will be replaced with new 'tax evasion' avoidance schemes. Surely this massive watering down of Italian austerity will work: just ask Greece how effective the whole crack down on tax avoidance was. At least the Piazza Navona strike cam can be dropped for now... or at least until bond vigilantes strike in Rome again, and the country does the whole austerity charade again.

Kiss the free market goodbye. Spain's and France's regulator have both just announced that the short selling ban, which was supposed to expire tomorrow, has now been extended until the end of September 30, and November 11, respectively. Add to this Belgium and Greece whose regulators announced they will lift its own short selling ban "when conditions allow", or some time in October, in and we can pretty much be confident that the European market rout seen earlier is due to someone leaking the news that price discovery in Europe is now officially over.

They can strike... Or they can create post-modernist art. They appear to have taken the latter approach for now. Once they realize that artistically beheading fictitious clowns (whose burgers cost over $17 in Zurich, thank you stable dollar policy) does not pay the entitlement benefits, the former is next in the queue.

Remember when on Friday, following the summary of the proposed Italian austerity measures, we said that "within a few weeks we expect the strike (and riot)-cam to be planted firmly in the Piazza Navona and across the streets ot the Trastevere in capturing the latest round of European indignation" and some assumed this was yet more sarcasm? Nope. As the AP reports, "the leader of Italy's largest union is threatening a general strike against an austerity package that Premier Silvio Berlusconi's government hastily pushed through to balance the budget by 2013 and avoid financial collapse. The threat came amid mounting criticism Sunday of the euro45.5 billion ($64.8 billion) package passed Friday in response to demands by the European Central Bank." Incidentally, $64.8 billion in cuts... out of $1.8 trillion in debt....that makes even the farcical $2.1 trillion deficit cut plan passed by the muppets in DC appear gargantuan in context. What happens when S&P tells Italy it has to increase the cuts fivefold to avoid more downgrades? At that point the strikes in Italy will be 24/7/365. And what happens when S&P wakes up and realizes that the same is applicable for France, and that any realistic cuts will force French GDP, which on Friday came at a very disappointing 0.0%, to turn wildly negative, as strikes next shift from Rome to Paris... Just how stable will that vaunted AAA rating of France be at that point? But of course, nobody will have been able to see it coming.

Stop the presses. Barely did we have time to report that European regulators failed to impose a coordinated short selling ban, that Bloomberg reports that the countries most impact by the market plunge are about to impose standalone short-selling bans. These are Belgium, Italy, Spain and France. In other words, it really is on and the 2008 Lehman PTSD flashbacks may now resume. Until we get a headline that says it isn't. The rescue of the Borsa Italian is now more schizophrenic than that of Greece. As a reminder, in the previous post the FT quoted Abraham Lioui, a professor at the Edhec business school in France, who said “It is the worst thing to do right now. This would signal to the market there may be something fundamentally bad that is happening."  He is correct. Something is fundamentally very wrong and about to break.

Remember when we said yesteday that the FTSE MIB won't have a good day today? It isn't...

Below is a a chart of Italian bank equity performance. Countrywide bank run next? Whether the reason for the sell off is due to a typoed GOFO 12M SocGen print or there is a fundamental reason, remains to be seen, but US equities are not taking the risk. US stocks have wiped out all of yesterday's last minute gains.

This aggression of a red close in the FTSE MIB will not stand man. Which is why Trichet just went ahead and sent the cavalry to buy another X billion worth of Irish 10 years to send a powerful message that European taxpayer capital will be used to purchase worthless paper that is cash flow bad, until morale improves.

Fiat (F IM) and Pirelli (PC IM) shares suspended for excessive losses. That is all.

Remember when we said (yesterday) that Germany will soon balk over the fact that it is pledging its entire economy to bail out an insolvent Europe? Well, that moment has come.

• German Govt: Italy Too Big For EFSF To Save - Spiegel
• German Govt: Doubts Whether Tripling EFSF Would Help It Save Italy
• German Govt: Italy Must Make Savings, Reforms To Exit Crisis - Spiegel
• Italy Debt Guarantee Could Raise Doubts Over Germany's Finances - Spiegel
• German Govt: EFSF Should Only Help Small, Mid-Size Countries - Spiegel

Here is your chance to see Italy's troubled PM FinMin Giulio Tremonti and even more troubled Prime Minister Berlusconi hold a press briefing on the topic of Italy's economy and market, and attempt to soothe stocks. Judging by the ongoing flash crash across various open markets, they better have something convincing to say.