Italy next week

Bruce Krasting's picture

Some stories in European press (La Stampa - Zero Hedge link) suggest that Italy is working on a very big loan package from the IMF. I have no doubt that there are ongoing discussions. There has to be. Either someone puts a finger in the dike or Italy goes tapioca.

That thought is difficult for me to fathom. How could we be so close to the brink? At this point there is zero possibility that Italy can refinance any portion of its $300b of 2012 maturing debt. If there is anyone at the table who still still thinks that Italy can pull off a miracle, they are wrong. I’m certain that the finance guys at the ECB and Italian CB understand this. I repeat, there is a zero chance for a market solution for Italy. Either the ECB (aka Germany) steps in and underwrites the debt with some form of Euro bonds or the IMF (aka the USA) steps in with some very serious money.

I have acknowledged in recent articles that I misread the Italian story. I didn't see this coming at the pace that it has. Italian bond yields more than doubled in a month. I was not alone in this very big misread. I believe it has caught everyone flatfooted. Central bankers and finance officials all over the globe are crapping in their pants.

I think the Italian story is make or break. Either this gets fixed or Italy defaults in less than six months. The default option is not really an option that policy makers would consider. If Italy can’t make it, then there will be a very big crashing sound. It would end up taking out most of the global lenders, a fair number of countries would follow into Italy’s vortex. In my opinion a default by Italy is certain to bring a global depression; one that would take many years to crawl out of. The policy makers are aware of this too.

So I say something is brewing. And yes, if there is a plan in the works it must involve the IMF. And yes, it’s going to be big.

Please do not read this and conclude that some headline is coming that will make us all feel happy again. I think headlines are coming. But those headlines are likely to scare the crap out of the markets once the implications are understood.

In the real world of global finance the reality is that any country that is forced to accept an IMF bailout is also blocked from issuing debt in the public markets. IMF (or other supranational debt) is ALWAYS senior to other indebtedness of the country. That’s just the way it works. When Italy borrows money from the IMF it automatically subordinates the existing creditors. Lenders hate this. They will vote with their feet and take a pass at Italian new debt issuance for a long time to come. Once the process starts, it will not end. There will be a snow ball of other creditors. That's exactly what happened in the 80's when Mexico failed; within a year two dozen other countries were forced to their debt knees. (I had a front row seat.)

I don’t see a way out of this box. The liquidity crisis in Italy is scaring us to death, the solution will almost certainly kill us.






The news announced last week where the IMF is providing EU countries a new "crisis" lending facility equal to 5Xs their IMF quota is a joke. What has been offered is a drop in the bucket against what is required. The La Stampa story today and this discussion are about something separate and distinct. What would be required is a step without precedent. It would dwarf what the IMF put forward just a few days ago.

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boiltherich's picture

If Italy can’t make it, then there will be a very big crashing sound. It would end up taking out most of the global lenders, a fair number of countries would follow into Italy’s vortex. In my opinion a default by Italy is certain to bring a global depression; one that would take many years to crawl out of.


If Italy can't make it then why would Greece, Ireland, Portugal, Spain, Cyprus, or any other indebted nation?  Not to mention if Italy takes a dump on the markets France, Britain, and Germany will have so many dead banks that in essence any bank doing business in euro would be gone instantly.  It would take out both the lenders and the debtor states.  I know that if I owed $200 and I was being punished dramatically for an inability to refinance that debt and my neighbor owed $20,000 and he was given a spanking new low interest loan I would sure not be happy about it.  Either way I see the bailout of Italy as damaging any prospect of getting the other PIIGS to play the Franco-German game.

Also, if the IMF shoulders a rescue eventually amounting to a trillion dollars that would mean Americans would have to put up 177.7 billion of it, I really do not think that the citizens will sit quietly for that, for one thing because it would be money pissed down a rat hole unless and until there is a eurobond federalized debt union and all euro debt were comingled and refinanced and that would be something in the many trillions of dollars. 

As to a default by Italy precipitating a global depression I simply cannot agree with you Bruce, only because we are ALREADY in a global depression.  I think either way, huge new bailouts starting with Italy, or huge new defaults starting with Italy, it cannot lower us into a depression but simply make the current depression that much worse so that nobody can go on pretending that faux statistics equal a growing economy. 

As the hill we are climbing gets steeper and steeper each kick of the can falls shorter and shorter.  I do not know how much additional time they can buy with gargantuan new rounds of bailouts but I am thinking that if the USA via the IMF does bailout Italy then our credit will be cut a lot harder than the mere loss of AAA.  Japan by the way contributes 6.57% to the needs of the IMF, how do you think Uncle Takahiro is going to take Japan getting hit up to bail Italy for their share, 65.7 billion with all the problems they have? 

I have read for weeks now since it first became plausible that Italy was spinning out of control, TOO BIG TO BAIL, TOO BIG TO FAIL.  If there now has to be a huge bailout of all the PIIGS then let it be done via ECB printing and devaluation of the euro.  Why should the rest of the planet pay to support the euro at $1.35-1.45?  Just because of German threats and paranoia about inflation?  Because Berlin wants to keep oil cheap(er) and call the shots in Europe?  No fucking way, time to let it collapse.

The Big Ching-aso's picture


Let me very deeply analyze this complex situation for you.

Italy will get bailed out the most because the Mafia and the Vatican mainly lives there.     In Portugal, Spain, France, Britain, and Germany, not so much.

Mediocritas's picture

Assuming the trans-atlantic euro + eurodollar QE3 happens the way I (we?) think it will, briefly:

- Fed pumps eurodollars into Europe via asset swaps with Europe-exposed banks holding USD-denominated "assets" (meaning overpayment for shit, meaning future inflation)

- ECB eases with euros, exactly the same as the Fed's QE1, just in Europe and denominated in euros. ECB ends up with an expanded balance sheet full of overvalued Eurotrash debt. Banks laugh all the way to next bubble. Extent likely limited by German resistance and political quagmire.

- Fed supports ECB by pumping euros into Europe by depleting its own euro reserves, then increasing the limit on its swapline with the ECB and pulling more euros that way. It will be considered "safe" because USDs created to enable euro creation via swap will remain domiciled in Fed and ECB accounts. Euros will be used to acquire Eurotrash debt in support of the ECB (which may be hamstrung). Aim will be to eventually swap eurotrash debt back to the ECB in exchange for euros which will then be swapped back for USDs to zero the swap-lines. Net effect, ECB does QE1 with Fed help, Fed has a clean set of books. Major problem is transient risk. If the ECB blows up while the Fed has eurotrash on the books -> big, big trouble. Either way, investors in the US will be spooked.

The numbers here will be big, real big. (QE1 + QE2) * 2 I would guess, minimum. Assuming it goes down something like this, then I believe that QE3 may stall the current crisis, only to replace it with another. I suspect it will deal a fatal blow to the USD. Being the world reserve currency, eurodollar holdings exceed dollars, creating a unique risk for the USD. As the US economy continues to degrade and political / social system continues to implode, QE3 pushes the risk dial to 11/10 meaning it's only a matter of time until nations start dumping dollars and trading directly in other currencies. A flood of repatriating eurodollars is the death of the USD.

It'll be a hard sell to chop the USD but it will be the only way to stabilize the world economy in the aftermath. The eurodollar component of the USD will have to be excised (to become SDRs) and the remaining USD inflates into the gutter, or "stability" is encouraged by moving to the Amero. The latter option was considered plausible by the elites I'm sure, until recently. Now, it's a damn near impossible sell given the disaster of the euro currency union.

Of course, the US may elect to "protect" itself and let Europe tank, but "protect" is a relative term not an absolute one.

Long term, there really is only one solution. Massive political overhaul, worldwide and an entirely re-invented financial system. There will be war preceding it. Highly optimistic that we eventually come out of it healthy.

Escapeclaws's picture

I wish I understood this post better. What you say sounds plausible, but either Bruce or Tyler or someone of that caliber should weigh in on this instead of letting it go flitting by without being commented on.

barliman's picture


That post is a loose conglomeration of statements made by various contributors on ZH over the last 1.5 years but adds no new insight or perspective.

On relevancy to the topic at hand - it is at least 8 months behind the current curve of discussion (Note: Even CNBC isn't talking about QE3 anymore)

The loud, white noise sound you hear during market hours is the world economy coming unzipped to the tune of $ 700 trillion USD ...


Mediocritas's picture

Not relevant? That's funny, because when I look in the media today what I see is everyone coming around to just what I've been saying (and repeated above) for a long time now, that the Fed is going to have to support the ECB in bailing out Europe. Here's an example from Ambrose Evans-Pritchard (Nov 27):


However, debate is already joined – and wheels are turning in Washington policy basements – so let me throw this out for readers to chew over.


Nobel economist Myron Scholes first floated the idea over lunch at a Riksbank forum in August. "I wonder whether Bernanke might not say that `we believe in a harmonized world, that the Europeans are our friends, and we know that the ECB can't print money to buy bonds because the Germans won't let them. And since the ECB will soon run out of money, we will step in and start buying European government bonds for them'. It is something to think about," he said.


This is not as eccentric as it sounds. The Fed’s Ben Bernanke touched on the theme in a speech in November 2002 – “Deflation: making sure it doesn't happen here” – now viewed as his policy `road map' in extremis. "The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations," he said.


Berkeley’s Brad DeLong said it is time for Bernanke to act on this as the world lurches straight into 1931 and a Great Depression II. “The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash,” he said.


The Fed could buy €2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world’s paramount monetary force might alone bring Italian and Spanish yields back down below 5pc, before one bent nickel is even spent.

Those words sound familiar. Hey look, here's me back in June (before Scholes):

The ECB has proven to be a toothless tiger, not surprising given that Europe is such a political place. It seems incapable of direct intervention, but perhaps it can be indirect?


If panic ensues in the Eurozone and euro-denominated debt starts getting dumped in a big way, what’s to stop the ECB opening up a huge swap line with the Fed? About $2T should amply cover it. The Fed can then backstop the bid in european debt markets to provide stability and when things calm down, flip it all to the ECB to cancel the swap. That’s one way to get around constraining European regulation.

And some more familiar words from a discussion with Cullen Roche (Sep 6) regarding the Fed's mandate:

As I’m sure you know, the Fed can indeed buy large amounts of foreign sovereign debt, as stated by Bernanke himself in his “helicopter” speech:


…the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.

 To which a qualifying statement was later provided, and to which you refer:


The Fed has committed to the Congress that it will not use this power to “bail out” foreign governments; hence in practice it would purchase only highly rated foreign government debt.

 So my question to you (or anyone else who has an answer) is, where is the line truly drawn here? Exactly and specifically, just how constrained by law is the Fed in reality? I don’t know the answer, but this language sounds mighty loose to me. A lot also legally depends on how “bailout” is formally defined and when it is formally declared.

I've been well ahead of the game the whole time and still am. The QE3 that you're referring to, the talk on CNBC months ago wasn't QE3 at all, it was Twist. That's not quantitative, it's qualitative, so please explain to me why it's not relevant to be talking about QE3 when we haven't even had QE3 yet? The media isn't using the term "QE3" now because the media is, as always, behind the game.

Here's another post from August where I outline the need for Fed intervention in Europe and the consequence of ISDA shenanegans (which led to MF Global):

Here's another from August regarding mechanism of action for the coming QE3. Pay attention to who commented straight after me and missed the major issue at the time but yet now talks about it as if he knew all along and feels he's in a position to flip off the guy who was amongst the first to explain what is now becoming the issue of the day: "getting ugly DC style"

cbaba's picture

Hi Bruce, yes you might be correct about Italy, and Italy might be saved by IMF , then what ? Who is next ?

how about Spain ? Greece, and then Ireland, Belgium, and finally France ... It never ends.

Who is saving whom ? All the countries are more or less in same deep S. The only way at this point to save a country thru IMF might be a stealth way to steal their Gold . There is no happy end here...

Peter Simple's picture

Revalue the Eurogold by a factor of ten.


chump666's picture

Greece is going Italy is next and Germany will re-cap (emergency style) it's banks, with  countries looking after their own. Europe will fall into a tribal mentality i.e each tribe for themselves.  This has less to do with economics and more to do with anthropology. 

The IMF bailout should be scaring the market more than making it bid.

The bids are best on the black friday sale like it's 1999

TimmyM's picture

Bruce, it is beneath you to act as the messenger for the big bankster extortion.
If we let the banking system fail, then those parts of it that play a vital economic role will be recapitalized by the market.
The end of the world as you know it is really just the new dawn of the meritorious system to evolve from your perception of anarchy.
Please spare us anymore of your Hank on one knee before Nancy act. It made me nauseous then and it does now.

oilpig's picture

The talk is no doubt real, but big IMF money requires the US Congress to approve funding. The only way that happens is Geithner channelling Hank Paulson with an end of the world ultimatum, which in turn requires the stock market falling apart, starting tomorrow. IMO.

nmewn's picture

"Either someone puts a finger in the dike or Italy goes tapioca."

I think someone already pulled on a finger and there is tapioca in their shorts as a

Kayman's picture


Uhh.... sir... that wasn't a dike and it sure doesn't smell like tapioca.

Greetings my friend

bobbydelgreco's picture

don't worry about italy worry about those who loan them money

barliman's picture



As always, a good article. There is no way out but through the pain. The same choice was the best choice three years ago. The same money and time that has now been wasted on "pretending" could have been spent after the banks failed.

Bernanke et al learned NOTHING from life or the Great Depression. Their errors this time will lead to suffering for billions of people.


non_anon's picture

mama mia, thatsa' spicy meatball

SwingForce's picture

"The Creature From Jekyll Island", by G. Edward Griffin  (Top Right, click DOWNLOAD and then Download Anyway):

He's still alive, and writes a newsletter:

BennyBoy's picture

Why should I (taxpayers) get saddled with the debt of fraudulent bankrupt banks and their crony governments?

DeeDeeTwo's picture

Because slaves give birth to slaves, baby.

LeBalance's picture

why should you (the chattel slave of the masters, their asset and lifelong source of power) get saddled with....?

why? because they can.

CPL's picture

you mean all over the world?  Fun huh?

Tuffmug's picture

Greeks extorted EZ with threat of default to bail them out. Now it's EZ's turn to extort US with threat of Euro collapse via Italy and Spain. Direct defaults and a Euro collapse are not inevitable. They are political choices that TPTB will not allow. Fraud is now the basis of all political and economic systems. The world fiat money fraud is a Ponzi that will survive via chronic controlled money printing as we continue towards Japanese style Zombieconomies.  The TBTB plan is for debt slavery, stealth inflation, market manipulations and financial repression.

sabra1's picture

God's plan, is to cast the 1%ers into the fires of hell!

pvzh's picture

Do not presume that you know God's plan. He might be planning to collect kickbacks for re-directing traffic to heaven and/or heaven entrance fees.

Tuffmug's picture

The 1%er's plan is to arrive in Hell in fireproof Gucci suits and loafers!

Tao 4 the Show's picture

Bruce - I enjoy your pieces as they are often a clear presentation of the current situation within the existing system. Because you post on ZH, though, I think it's fair enough to point out that all of your thinking builds around assumptions of the ultimate omnipotence and stability of this system (e.g. They won't let X happen...).

This thinking is understandable given how long the current system has been operating and what is at stake. But what I think is really driving the majority of commentators who think this way is that their (your) entire livelihood, work history (and typically skill set) are 100% interwoven with this reality. You have a deeply vested interest.

If the ship is really going down as it appears, a difficult point to accept is going to be that unless you are part of THE privileged class (probably the top 0.001%), you are not part of any privileged class and the world of finance you thought you belonged to has ejected you as uneventfully as it ejected any average guy in middle America who couldn't even afford Walmart Christmas presents for his kids this year. (For those wondering, most of the people you saw on this year's Walmart Black Friday videos are likely living on some type of social welfare.)

The waves of disbelief coming are going to be interesting to watch. Gulping down large mouthfuls of saltwater in utter shock, for one, are going to be the financial class who really think they are part of the club. MF Global and the recent layoffs are like a tsunami warning - made everybody nervous, but nobody believes it's really a big deal.

americanspirit's picture

Exactly Tao - first the water receeds and everybody stands on the beach and wonders what's happening. Then a thin line forms on the horizon that nobody notices - except all of a sudden it's real quite because all the birds and animals have headed inland. Then that thin line on the horizon gets a little thicker, and people on the beach who are equipped with ESP begin getting nervous, gathering up their towels, and heading for their beachfront cabanas. A few of them even get on mopeds and head for higher ground - but not many. Then the guys fishing way out on the end of the jetty disappear. And then ..

Landrew's picture

I watched a seiche from the planetarium in Chicago. Strange feelings, all the boats in the harbor fell over, then people started to walk out, then the siren blast turned them back.

cdskiller's picture

Exactly. I am absolutely fed up with the fear mongering. It's beneath respect. All these worthless metaphors, comparing bank, government or trader losses as being the equivalent of apocalypse, or being on the brink of something unimaginably horrible, or of a contagion of black plague spreading uncontrollably across the globe. It's BS by people with skin in the game, trying to get people without skin in the game to fork over cash. The fear mongering is not by people who want to protect the rest of us. It's a trickle-down financial threat. Save me, or I will blow you up, punk!

pain_and_soros's picture

It has become a form of (perhaps uninentional) financial blackmail, and the reason it has worked to date is the misguided perception that if we just continue to do as we've done in the past (i.e., create more debt) then we can keep the status quo and avoid a bad outcome, when the reality is that there is no choice that leads to a good outcome, only bad alternative ones (compared to the unsustainable reality we have now). 

And perspectives of those outcomes are different - if you're German, Weimar hyperinflation and what that ultimately led to is seared into your psyhce - any other outcome is perceived to be better than that option (which really isn't a viable option). If you are Italian, Greek, Spanish, etc., you are used to the "solution" of devaluation of your currency to keep you "competitive".

When faced with (or forced to make) a choice among bad alternatives/outcomes, the 1st inclination is to kick the can down the road, hoping that it will either go away or end up being someone else's problem to deal with.  However, we are at the point where the can has hit the debt wall in western economies and can no longer be kicked.  Hard choices are all that remain, and politicians realize that choosing any option is ultimately political suicide, so indecision, confusion and disorder reign.

The question is will a politician, recognizing that they are in a no-win situation, summon the courage to stand up to the bankers on behalf of their electorate and let them fail, or will they acquiesce and completely sell-out their populations to debt slavery?

I suspect it will be the latter, since the banking elite will look after the politicians who do their bidding when the $hit hits the fan.

As for the the fallout, I fear people will be seen increasingly as expendable from an individual, corporate and country perspective. 

LeBalance's picture

there are 7b people on the planet.

can we support 14b in 30 years?

can you find the resources and infrastructure to make that happen?

is the money exponential mirroring the population/energy exponential in such a way that they are actually the same beast?

in these pages we are monitoring a much much deeper issue than who owe who what toilet paper.

hope this helps your backhand.

IQ 101's picture

Populations in the west are shrinking across the board, except of course the immigrant communities, see Denmark, Italy, USA.

So it would appear that the problem is not global but third world,

mother nature often takes care of these things in her own way, but i'm sure the bleeding hearts will insist whitey is to blame and ought to do something, well,heads up, whitey is going to be busy cleaning his own mess in the coming decades.

John Law Lives's picture

The MSM is out in full force to get the markets juiced this week. Rumors of a massive IMF loan to Italy, strong retail spending in the US, rumors of a Merkel/Sarkozy "Stability Pact" in the works etc. Amazing how the machine will lash out when the wealthy feel threatened...

Tuffmug's picture

Fraud is what they do best.

FinalCollapse's picture

The typical weekend rumor mill at full force. The EUR already points much higher, based on rumors and lies. No one even tries to think if these rumors have any validity attached to them. 

pebblewriter's picture

Write-offs or riots.

zippy_uk's picture

Mafio banco de kneecapper - credit for you soul, gauranteed by those who sleep with the fishes

Georgesblog's picture

The story earlier today, that the Fed is going to kick in 600B in seed money for Italy may keep the Ponzi scheme going. It's more likely that U. S. banks start turning turtle.

monopoly's picture

I do not even know how to respond to this anymore. It is surreal, something from outer space. And the sheeples, well, gotta watch Desperate Housewives tonight. I will get back to you.

flrzero's picture

Tyler's other article was off base. The IMF has the NAB, which has a credit line of SDR 370 billion from 40 "rich" members (including Italy). The NAB facility will be reduced if and when the quotas are increased in 2012.

Eireann go Brach's picture

I am sure Bernanke and Geitner will ride to the rescue and are concocting a plan as we speak, remember they work for the banks and no one else, so if they cannot funnel money through the international banking cartel known as the IMF due to reasons Tyler spelled out today, then I am sure the Fed will come up with something! So what happens when France goes next?......time for the chips to fall!

QQQBall's picture

Yes Ben and Timmy are going to save the wogs. Why not just transfer the Social Security "lock box" to the Italians or the Greeks? Why should they wait until 65 years old to benefit?  Oh wait - the lock box is full of bad paper?

DeadFred's picture

This is the $64,000 question, what can the Fed do? No one else can stop it but is Ben really out of bullets? I'm always astounded by the left-handed switch-a-roos these guys can try that sometimes work and always cause a brief rumor-rally. Is there any feasible option left for them?

hourglass86's picture

Welcome to Soviet European Union bitchez, where central planners and twisted bankers with the help of their puppet Merkozy are taking over democracy.  

DosZap's picture


Welcome to Soviet European Union bitchez, where central planners and twisted bankers with the help of their puppet Merkozy are taking over democracy.

Shit ain't nuttin, next week the Congress votes on ALL of America being a war zone, and Habeas Corpas/ALL BOR's lost, and we will be same as China or worse( YOUR rights are belong to us!) is out the window, along w/ the Constitution, and Free speech, right to a lawyer,unlimited prison terms (do not have to have a reason), etc,etc,etc.

If that passed, MAY Be relocate time to Russia.Or China.

Escapeclaws's picture

Actually, this probably has a lot to do with what's coming if this house of cards comes crashing down. The two topics are not unrelated. They must know already that there will not be a positive outcome to this. America will essentially no longer exist if this vote passes.

apberusdisvet's picture

The BIS can order Bernanke to print (because the ECB cannot), but the extend and pretend games end when China implodes; probably next year.