This page has been archived and commenting is disabled.
Italy next week
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.
.
.
Note:
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.
»
- advertisements -
Bruce, I couldn't figure out why Tsy's sold off so hard on Friday. The USA funding the IMF so they can do this is prob the reason.
Correct me if I am wrong, but I personally do not see any reason for the high drama with Italy. Their debt is long term and locked into the old, low interest rate (say around 3.33%). They are rolling only small part of their debt -about 12% of it. Let's say they new interest rate will be around 10%.
For the $300B their interest payments at 3.33% (approx) were about $10B per year. Let's say the interest on the newly rolled debt goes up to 10%, so the annual payments on it will be $30B. It is a difference of $20B. Not a small change, but it is a tiny part if Italian GDP. All they need to do, is to make sure that their primary budget (excluding interest payments) is a surplus of about 1% to 2% (for safety). Their primary budget is nearly balanced anyway.
Why such a drama? Let Italians pay for what they borrowed. They used to pay high interest before, so it is not news to them.
Good point, do you have new funding figures? Just wondering the total new debt servicing reqm'ts?
Mostly based on Bruce's numbers, and I trust that he did his homework. The Italy's GDP is $2T, and their debt to GDP is 120%, so their debt is around $2.4T.
So far, their interest payments only amount to 4% of GDP (3.3% of $2.5T=$80B). I used very approximate numbers here.
They need to roll $$300B in debt. Let's say the market will lend (?) them at 10%. This will be $30B ($20B more than before).
If my math is good, in 2012 they expected to pay $80B in interest, andnow they will need to pay $100B in interest. Their interest expense will jump from 4% of GDP to 5% of GDP. Scary - but not the end of the world. They will need to get serious with austerity, generate at least 5% of the primary budget surplus, if they want to get handle on it in the long term. In the short term the 2% surplus will be OK.
The $64K question is, how much their GDP will decline as a result of the new austerity measures.
FinalCollapse
A better analysis would contain all government debt, plus private debt. And don't forget off-balance sheet and undisclosed debt.
Hiding the sausage seems to be Italy's masterpiece.
Thanks for that. It appears you mean that no additional debt will be generated this year (perhaps 2% surplus) so we are only talking about servicing previously incurred debt (and at what additional rate of interest)? If this is true (and you appear to know what you are talking about), then you have given me what I asked for, appreciate it. I agree those numbers don't seem insurmountable, the caveat being any large decline in revenue from a lower GDP. Thanks again!
Who would have thought? The New World Order is going to arrive riding in all it's glory on the back of International Bank Loans...
rufusbird
Something BIG is happening. Italy gets tons of money. After the record-Black Friday and Belgian new gov, only positive news. Stocks will rise, yields fall. What crisis?
Hey Amazement, hows the xmas turkey?
BTW ; the euro has two months to live at most, or so they say. Italy cannot get money from IMF 'cos that puts it DE FACTO out of Eurogroup, depending for its dough on mulitlateral fund, like a latter day Argentina. That's why Lagarde has back tracked, she is now saying there are NO talks with Italy. SHe has realised this desperate media ploy is dangerous smoke screen as it means that IMF is virtually saying : "ECB you're dead, according to us". That in itself will light the powder keg. These Oligarchs and their lending shills, like IMF, have their heads up their...Turkey ass, like toxic stuffing.
So..What crisis? ... is that a new xmas carol?
Merry xmas but don't count on eating THAT Turkey.
#Winning!
LOL
But, but Italy only have internal debs.....
You have some hits and misses. This is a miss. Default is inevitable one way or another. Outright or through inflation.
The new IMF package is a joke becuase, as Tyler points out, they don't have the money and can't get it without the US Congress agreeing. Good luck with that.
We don't have a govt so Ben can send all the money he wants anywhere in .02 seconds.
The US gubmint perfected the "sidestep"(from The Best Little Whorehouse in Texas) decades ago. Who needs CONgress?
6 months? That seems to coincide with this very handy new resource. Something's up.
http://europeanfinancialsystemdeathclock.com/
The new resource estimates 'the end' at 15 April 2012. Which is exactly 100 years and one day, after the Titanic sunk....
Nice script.
Default will happen. There is no realistic option to avoid it. The US has to print the money to fund the IMF to keep Italy afloat because the Germans wisely refuse to? Who will do that for the US? Santa Claus? This is beyond absurd.
Santa "Ben Bernanke" Claus - that is who. The whole point of setting up the Federal Reserve in 1913 was / is so there would always be a backstop for US banks. Avoid another Panic of 1907. US Bank counterparty gross risk with European Banks means that if Europe goes down, so do US Banks. Even if Net counterparty risk is low, counting on everyone to step up to their CDS and other obligations. But that house of cards is about to tumble. So given the original and still primary priority and mandate, the Fed will create money in any way they can to prevent a nominal default of the US banking system.
http://en.wikipedia.org/wiki/Panic_of_1907
http://en.wikipedia.org/wiki/Creature_from_Jekyll_Island#The_Creature_fr...
The real value of money is an entirely different issue. The charade for public consumption is the banking system not "defaulting". Stealth default by inflation / money creation from thin air is what will happen. The real value of the dollar has dropped by 98% since the Fed was created in 1913, so why should a further drop in the real value of the dollar be a concern to the Fed now? Maintaining the charade of US Bank not defaulting in nominal dollar terms is what is important to the Fed. And to the political class looking at the 2012 election cycle, and to Bankers looking to stretch out big bonus seasons for as long as the charade can be maintained.
It is absurd, but that does not mean it will not happen.
well, look on the bright side...after we have our Weimar moment we'll be gun shy for the next 100 years as well....
'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.'
So Bernanke it is. Not sure he represents the USA but whatever. Forget currency wars, just plain wars dead ahead.
"Either someone puts a finger in the dike or Italy goes tapioca."
She is too ugly to have anyones finger.
Mixed metaphor Bruce, but spot on, as usual.
Bruce you have never been able to accept that the entire system is completely corrupted. There is no way out of the box because the box is decayed and decrepit. But far worse, you have often supported the sovereign states in their tax wars against those who are forced pay taxes to the gangsters. You stated that people who refuse or limit the amount of taxes that they pay to support these gangsters are "tax cheats". Your "tax cheats" are actually the patriots who are trying to starve the beast.
Bruce, you are part of the problem. Wake up.
http://www.youtube.com/watch?v=dX41SkKN0tQ
That IMF loans ( and ECB holdings?) can't be haircut may not leave a lot left for those holding PIIGS debt. Since a lot of those left holding this debt will be Euro banks, allowing Italy et al to roll their debt would seem to exacerbate the problem of recapitalizing the Euro banking system. I also note that the PIIGS and Belgium constitute 8.36% of IMF quotas. Obviously, likely recipients of IMF loans cannot at the same time be contributors to them this will also make it even more difficult to raise the funds needed for an IMF bailout.
Italy doesn't need banks! The mob is willing to lend money to everybody!
The banksters are mobsters. You think they didn't go 'legitimate'?
Good Point !
Italian Mobsters dealing with New York and London Mobsters. Perhaps this could get interesting. Even "God's" banker was found hanging under a bridge.
Somewhere I think the bullshit is gonna stop. I think a few Europeans are still very pissed over the slice-and-dice bullshit U.S. mortgages that got dumped on them by the "doing God's work" crew in New York.
Top 10 Reasons Why the Mafia is Better [ & cheaper ] than the State
http://www.youtube.com/watch?v=IErlI34-0so
Without growth, what chance do any of us have? So you forgive or you print, what have you solved? No ones doubts you can float your way out of temporary insolvency, but can you debase yourself into growth?
After all, Japan just printed negative, again. When will they ever experience growth? For growth is largely based in housing and the "productive" population of the developed world is in decline. It's good that we'll all live to be octogenarians, but this has it's implications. Once you have a semblance of all of the basic material accouterments, only consumables are left and "sin tax" and obesity have now also reached their zenith. All that is left is a value trap where the car / house / appliances & furnishings you have are fine unless a "value" presents itself. It's not a bad thing, but far too few in the developed world have real need and growth is based on need, not want.
Since inventions of social transformation seems to have reached it's nadir, maybe the concept of planned obsolescence needs to be revisited. Certainly war is one method, but perhaps there is a way to accept a controlled method of creative destruction that creates growth without undue suffering.
TC Surfer
Well thought, well stated.
The parasite has outgrown the host (the only growth in several decades is the FIRE sector).
We are shamed into believing "global free trade" is a good thing; there is no such thing as free trade, and the USA is the biggest loser in the long run.
We will either muddle along or the (lack of) foundation at the Fed and Treasury will result in us hitting the wall of worthless, bidless paper.
No growth is our future.
Please Bruce - " Either someone puts a finger in the dike or Italy goes tapioca." You mean Risotto not Tapioca! An there are very few ugly Italian dykes...
Excellent again Mr. Krasting. Thank you again for sharing your experience and insight. You're top drawer in this blog.
'IMF Bail Bonds. It's better to know us and not need us than to need us and not know us. We're there for you no matter your country's state of financial disrepair. IMF Bail Bonds. We're there for you. Just a phone call away. IMF, the solution-leader to today's unsolvable financial crises.'
that horse crap nebula is very large
The U.S./IMF will step up to bail out this ship because they don't want to expose their crappy musical chairs game and they don't care whether they screw the American taxpayer by continued devaluation of the dollar. <sarc>The FRN is just getting stronger so we might as well print some more to help out export business.</sarc> Oh, wait a minute, America doesn't really have much left to export except its inflation....gggooooooo Team! This is the perfect storm to begin to unveil the IMF and the world central bank with SDR's as the soup dejour....hhmmmm tasty.
Contagion, bitchez.
My guess has always been that this thing would happen fast, which is based on how fast things fell apart in the fall of 08...
Of course the problem is IMF will now have to bail Spain out in very short order, with Belgium and France right behind. What a joke!!
Hmmm - we may have to redefine "pixelated".
OK, now that the best case scenario is understood,
what are worst case possibilities?
What sound do you hear when Italian sovereignty hits the ground?
"What sound do you hear when Italian sovereignty hits the ground?"
Bada-BOOM!
Lamentations.
"I made them an offer they couldn't refuse."
where are those 700 T synthetic derivatives floating in outer space? Can Monti python catch a handfull to fill his empty pockets?
Christine Lagarde playing Mother Teresa looks a terribe cut and paste job. Who can believe that the IMF is there for charitable reasons? Its the people's blood not Oligarchy blood that will be claimed by them as always.
The solution to this problem is soooooo simple : Let the plutocrats fork up part of their 25 T stashed in tax havens. Cough up Oligarchs; pay from your ill gotten gains or get ready to bleed in financial tsunami. The people will bleed bur never bend to your incredible greed. Occam's razor. Yes and pronto! Xtreme Parsimony and deflationary redemption.
Italy has 2400 tons of gold. Why don't they use that? How much is that worth? Seems only logical that they could pay with their gold or at least use it as collateral.
No doubt they will but even at $1750/oz, that works out to only $150B or thereabouts, and its pretty much a guarantee that will only kick the can marginally farther down the road.
Mario Draghi, President of the European Central Bank, and Christine Lagarde, Managing Director of the International Monetary Fund, are no doubt hashing this out, along with the rest of the key decision-making Gdf (Groupe de Francfort: Draghi and Lagarde; Angela Merkel and Nicolas Sarkozy; José Manuel Barroso, Herman Van Rompuy, Jean-Claude Juncker and Olli Rehn).
They may not be using the Mexican or any other template for the IMF role, but might have yet another new-fangled mechanism. They may try to structure the IMF position to allow for (an imagined) quick re-entry into the marketplace within a fairly short time frame.
And the 'plan' may have a stout segment of outright surprise huge scale ECB printing - monetisation, on the gamble it can be pulled off here, with some EU treaty loopholes used for the occasion.
Somebody pointed out in a different link that if the US were to bail out Italy via the IMF Congress would have to vote on it and would vote it down, is that correct? Also if they voted it through for say 600 billion is that a QE event?