Italy Trumps Greece

Marc To Market's picture


News that the Greek bond buy scheme did not get sufficient takers to reach the 30 bln euro target set the commentariat ablaze.  This may prove to be a minor technicality as Greek banks initially offered 75% of the Greek bonds but were prepared to pitch them all if necessary to ensure EU aid is forthcoming, which is the source of their recapitalization funds.


The bigger story is the fall of the Monti technocrat government in Italy.  Berlusconi's PDL party pulled support by abstaining economic reform votes at the end of last week.   After a series of consultations with the Italian president, it appears that parliament will not be dissolved until two important pieces of legislation are approved, the 2013 budget and financial stability measures.  The former is needed for obvious domestic reasons.  The latter is needed to maintain credibility in  EMU; assuring its partners.


As the situation was unfolding on December 7, Italian bonds fared well, with the 10-year benchmark yield dropping 5 bp.  In comparison, 10-year Spanish yields fell 2 bp.  On the week, the Italian yield rose 3 bp, while Spain rose 14.  Italy's 10-year generic yield is about 93 bp below Spain's.  This is at the wider end of the  in recent months.  Recall that end of 2011, Italy was paying a 200 bp premium.


With parliament likely to have been dissolved in any event by the middle of next month to prepare for spring parliamentary elections (must be held within 70 days of the dissolution of parliament), it is not exactly clear why Berlusconi chose now to pull the plug.  As in many things of this nature, the decision may have been over-determined.


There are PDL politics to consider.  It was to hold a primary and Berlusconi had to make a decision whether to run or not.  There are politics in among the opposition to consider.  The PD had just picked their leader.  The old guard carried the day as the party leader Bersani turn aside a challenge by the charismatic Renzi.  Berlusconi may have seen this as an opportunity.  Recall that last year when Berlusconi was pushed out, it was not because of a convincing alternative by the opposition, but because of the hostility he arose internationally.  Proof of that, of course, is Monti's technocrat government.


Berlusconi may have also been emboldened by the economic data. Unemployment continues to rise.  The economy remains mired in a recession.   As this Great Graphic showed Monti's support continues to slump, and he draws little support from the sharp decline in bond yields over the past year.  Berlusconi's timing also corresponds to the new property tax that goes into effect.


S&P warned before the weekend that it would consider lowering Italy's rating if the recession continued well into 2013.  The Bloomberg consensus currently forecasts precisely that.  The economy is expected to contract through Q3 13.  Last week, the ECB staff cuts its 2013 euro area growth forecasts too.


The latest polls show the center-left PD with a 15 pt lead over Berlusconi's PDL.  There is also the 5-Star movement, which is the protest party, which like in other countries has emerged during the crisis.  On programmatic grounds, the 5-Star shares much in common with the PDL, including a skepticism of participating in monetary union.  Both 5-Star and the PDL are based on single personalities and it is not clear that all of Italy is big enough for the egos of Berlusconi and Grillo.


More worrisome for investors, is a renewed alliance between the Northern League and the PDL.  The risk is that it retracts, dilutes or in other ways backtrack from the necessary, even if insufficient reforms of Monti's government.


There are still numerous moving pieces.  It is not clear whether Monti government can pass electoral reform during its waning days.  It is not clear if the local elections, in which the left tends to do better, will be held before, with the national election (as the PDL wants) or afterwards.  If the PD wins, it is possible Monti becomes the next President of Italy.  A hung parliament could see Monti remain Prime Minister, either in a technocrat form or as a compromise candidate with a parliamentary majority.


Regardless of the particular details, the political risk in Italy has risen and Italian bonds will likely suffer as a result.  It could have knock negative repercussions for the euro.  With the latest turn in Italian politics, Italy may leap frog over both Greece and Spain as the source of angst for investors and policy makers.  


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Yen Cross's picture

France Trumps Italy/ 10year OATS @ 2%? Hollande the master of socialism?

magpie's picture

Are the French living off their savings like a Japanese post office, or does it have to do with that CHF peg (not to mention possible capital PIIGS flight and the UK obliged to buy for mysterious reasons)

Yen Cross's picture

Big Time. Just watch how ( LTRO 1 &2) doesn't get paid back! Those are 3 year (ECB) direct deposits/

magpie's picture

Yahoo should offer realtime quotes of France's Target 2 quotas

Yen Cross's picture

They should/ I like your thinking. I might be able to help....





  France 2-Year 0.041 0.033 0.118 0.022 0.008 24.24% 08/12   France 3-Year 0.168 0.160 0.285 0.156 0.008 5.00% 07/
Yen Cross's picture

Same game different name ;-)   The EFSF was the original "still born" child of the ECB(LTRO) uptake worthless bonds/notes from the PiiGS.

  The ECB is famous for sterilizing debt> Via  BIS and some other players. Deutche Bank & BUBA comes to mind.

 I'll get into the SNB (euro) sell off later... SNB has been unloading yards of euros to protect the 1.20 eur/chf peg!

 Guess what SNB is buying?  aud and gbp/

  foreward bitchez/ Nothing to see here

magpie's picture

just wondering, there should be a whole stack of 6 month EFSF debt in the market - gratis from the Greek finance ministry

Yen Cross's picture

Magpie there is shit load of short term paper. You my friend, are way too long on your thoughts. Explore OIS turnover/

 Swaps are in vogue.  I wish more honest people like you were around.  You are a good person magpie

magpie's picture

Honest ? Some might say blunt, and good - the opinions are varied on that, especially since i still have open accounts with the infotainment complex...

Joebloinvestor's picture

Who cares?

Get the party started!


bank guy in Brussels's picture

Italy may change the world in 2013 ... by Italy leaving the euro, creating short-term panic but ultimately a merciful good thing, much more than 'worrisome for investors' as said above.

The momentum in Italy is with the euro-sceptics:

- Silvio Berlusconi and his party, with Silvio already having called the euro "a scam" against the Mediterranean countries, and Silvio not yet campaigning yet with his strong message of returning Italian sovereignty

- Beppe Grillo and his party, with huge momentum and also euro-sceptic

- Northern League nationalists, intrinsically allies of the euro-sceptics

That's more than half of Italy right there above

If Berlusconi runs a campaign on giving Italians their sovereign rights back, leaving the euro, and becoming an economic success like Iceland, he could rocket upwards ... Berlusconi in a deal with Beppe Grillo's party and with the Northern League

So possible Italy euro-exit by 2Q 2013 ...

Italians have the best case for leaving the euro ... without the euro their exports would roar, debt costs would decrease, and they were already near primary budget surplus when the EU-ECB manoeuvred to kick out Berlusconi ... Italian households have less debt, overall more net worth than Germans ... They may well end the euro-farce shortly, the euro is the only thing holding back Italian prosperity ... and Italians are sick of arbitrary 'austerity' to screw them and benefit German banks

Italy leaving the euro-zone means a major 'moment' freezing up the euro-zone bond market and implosion of European banks ... and consquently Spain, Portugal, and Greece - and then perhaps even France - will all follow along out of the euro, as their only way to rebuild, the sick 'spell' finally broken.

Berlusconi, a bank holiday, short term super-intense European crisis and then re-start and re-birth ... 2013 in Europe! ....

The euro may well survive as a northern-Germanic and actually higher-value euro, the strongest fiat currency in the world after the euro-zone fracture  ... and with the Mediterranean countries out, it is even reasonable to see Sweden, Denmark and Switzerland join the euro as well (Switzerland without joining the EU). All those countries are currently dirty-pegging to the euro anyway.

Should Berlusconi take Italy out of the euro and end this 'austerity' debt-slavery agony of many tens of millions of people ... he yet may go into the books as a personally flawed but great bold politician of early 21st century Europe

Rari Nantes In Gurgite Vasto's picture

I bet you are short btps and just talking your book..........and a lot of rubbish at the same time.

Italy is a founding member of the Euro and of an increasingly integrated Europe since the very early days.

Italians have already paid in the past a tax without too much of a fuss in order to enter the Euro on day one, and are mostly pro Euro and Europe.

Your claim that debt cost will decrease, is without  shed of a doubt the most idiotic claim I have heard about the Italian public debt.

As leaving the Euro will by no means result in re denomination of the existing debt, not only interests and capital needed to be paid/ re-paid , but paid in a currency stronger than the new one adopted by Italy in your "perfectly sensible" scenario.

Not withstanding the complete closure of international market for a country that were to chose such path...

Given the absolute level of the Italian public debt, not really feasible, albeit not impossible from an academic point of view.

No wonder you work for a bank in Brussels (worldwide famous banking center.......NOT!)


Disclaimer: I am short btps, but I don't litter zero hedge, trying to push my book 

disabledvet's picture

France is a tough one to figure. On the one hand they basically invented "nationalism." On the other hand "they basically invented the EU." sound like important people. clearly the Masstricht "Growth and Stability" Pact is dead. Just as obviously the "Club Med" countries are looking for a "non-German" replacement to the current order...which of course means...FRANCE! Does that mean Italy will leave?...I doubt that France will ever leave the euro as a currency....clearly they have benefited massively from the "bailout regime" imposed on the Continent. here's the new bank HQ for the ECB: looks pretty fantsy pantsy! "every euro-crats wet dream" from what i'm told. good luck putting that genie back in the bottle. meanwhile back in the USA...

andrewp111's picture

It is a Napoleonic thing with the French. They expect to rule the EU, with a position senior to even that of Germany. While the ECB has the "money power", France is the only Eurozone State with the "bomb power", since it alone possesses deliverable nuclear weapons. Thus, France is the only Eurozone State that can still claim to be truly sovereign. When push comes to shove, the ECB or the EU Commission will fund the French deficit.

And that fancy pantsy ECB HQ looks like a nice tower from which to rule the EU.  The next ECB boss will be French.

ArgentoFisico's picture

Mr Banana (Berlusconi) says and says a lot of things but it's just an advertising man, it's all for the newspapers, the TV, it's a tease. He won't do anything but try to stay out of jail, believe me, i'm italian and it's 20 years we know him

andrewp111's picture

His only way to stay out of jail is to become PM again, since Italian PMs have sovereign immunity.

Freddie's picture

I hope so.  Italy has seen 2,000 + years of BS by corrupt politcians like the EU/Euro scum.  Berlasconi at least, as far as I know, is not a Goldman puppet like Monti and the other Mario GS puppet. 

andrewp111's picture

I like Berlusconi too. He is my favorite EU politician. Who else would tell a young prostitute "I'll cover you in gold" at one of his orgy parties. If he makes it back into power, at least the ladies of the night will have a good time at his orgies.

ArgentoFisico's picture

Yes, you're right, but he will not put himself in a clash with GS, be sure!

Freddie's picture

The only protestors I ever saw get inside, at least inside the front door, of Goldman Sachs were italians in Milan.

I wish my German was decent to understand what is going on in this video about the evil vampire squid.

Go to about 0.41 in the video.  Olberman makes me ill.  There was a better video on an Italian news site but I cannot find it.