Bridgewater Asks "Could Italy Blow Up The Euro?"

Tyler Durden's picture

Judging by the purchasing frenzy of Italian bonds today, most of it emanating out of Japan which after last night's epic snafu involving JGBs and the double halt of bond trading which may have spooked the "New BOJ-frontrunning Normal" Mrs Watanabe, not to mention Albert Edwards' recent rekindled love affair with the Mediterranean country, one may have left with the impression that all is well, and Italy is "safe." Not so fast: according to the world's biggest hedge fund (after the ECB and the NY Fed of course), Bridgewater, whose daily letter today is titled "Could Italy Blow Up The Euro?" things in Italy are hardly as rosy as market conditions make them appear (although as the BOE itself admitted, any link the policy vehicle known as the "market" may have had with economic fundamentals is long gone), and in fact may be set to get far worse.

Some of the key highlights:

Economic conditions in Italy are as depressed as they've been since the end of WWII, the economy is still contracting, Italy's banks are in terrible shape, private sector lending is very strained, and the ECB's policy is not resolving the problems. As is typical in countries enduring this level of economic pain, the political situation is starting to get pretty chaotic. Bersani, the top vote getter in the recent elections, has been unable to form a government, new elections this year are increasingiy likely, and recent polling suggests a dead heat among Bersani, Berlusconi and the anti-establishment party of Grillo. Surge in support for Grillo creates a risk because it is not entirely clear what he would do if he came to power. He has made a clear promise to put the euro to a vote and generally thinks that the European fiscal and monetary policies have been a bad deal for Italy. Obviously, an attempt to revisit those policies by a country as systemically important as Italy could destabilize things fast, and the risk of a radical outcome is growing. And over the past few months there are indications of that risk getting priced in and putting pressure on Italy, particularly on its banking system. Italian banking spreads are up; there has been a modest pullback in banks' wholesale funding, a modest increase in their ECB borrowing and no bond issuance. So far, the Italian sovereign has not come under as much pressure. Spreads have risen a bit, but issuance has been steady, and the government is so far meeting its needs for the year. However, there are some indications that things are getting tighter for them (a postponed 30 year auction, worse auction technicals, weaker foreign demand). And there isn't much margin for error, as the gross issuance needs are big and steady. And the sovereign is still relying on Italian banks to buy a lot of bonds.


So there is a risk that if economic conditions continue to be terrible and the political situation gets more extreme, the pressure on the banks will increase, and the sovereigns could start to have trouble (and with the political uncertainty, should the need arise, who would the Troika negotiate with?).

Those who have been following our coverage of the Italian fiasco in recent months will be quite aware with all of Bridgewater's caveats, however here are some of the important drill downs, especially as pertains the still woefully insolvent (and now leaking deposits) banking sector. To wit:

Italian banks increasingly look strained, both outright and relative to Spain. Bank CDS spreads have risen 150 basis points and bank eguity prices have fallen 30% in the past two months, and there are some indications of stress in the bank funding flows. Unlike in Spain, Italian banks have not decreased their reliance on the ECB at all, and in February they actually increased their net ECB funding. At the same time, wholesale funding lines with banks and non-banks are falling, and Italian banks have had substantial bond redemptions that they haven't rolled in February and March. Italian banks are getting liguidity by reducing private sector loans and through a healthy inflow of retail deposits, which is helping them to pay for the wholesale funding that is leaving. Italian banks bought government bonds at a healthy pace in January, but the purchases slowed in February, and they have been selling foreign corporate and bank bonds for the past six months.


Funding costs for the banks have risen about 150 bps over the past few months and have noticeably diverged from sovereign spreads

And the stocks of the big Italian bank have sold off pretty sharply. The stock prices of the three largest Italian banks are down almost 30% since late January.

Italian bank borrowing from the ECB has been increasing. Italian banks have only paid down a modest amount of their 3year LTRO borrowings, and their net reliance on the ECB increased by €11 bn in February (€6bn in new borrowing and a decline of €5bn in deposits). Spanish banks on the other hand have been reducing their ECB reliance at a rapid pace. Italian banks continue to fund 18% of domestic GDP and around 10% of their balance sheets at the ECB

The quality of Italian bank balance sheets has been deteriorating for years. NPLs are stili rising and Italy's banking system is on course to see historically bad losses.

And the scariest news for those few who are taking the words of UniCredit's CEO seriously, namely that deposit confiscations in Italy may well happen, is that NPL are soaring, and are likely orders of magnitude worse than the official data. Just like in Cyprus.

When we go asset-by-asset through the bank loan books, and look at various deleveraging cycles to gain historical perspective, we think a reasonable estimate is that Italian banks will end up with full cycle losses of 10% on their €1.5trIn of domestic loans, which would be a bit worse than bath the 1993 Spanish recession and similar to the recent US crisis (though the context of the Italian cycle would be that conditions continue to be worse and stimulation continues to be less than the recent US case, but with better quality loans and less leveraging up).


To summarize the adverse view:

So that's the situation in Italy: Conditions are depressed and play no small part in the prevailing political uncertainty. Increasing pressures are being placed on an already-stressed banking system. The sovereign is pretty reliant on those banks to buy their bonds, and there are modest signs of those sovereigns also getting pressured. But, there are a few countervailing forces: Growth conditions in Italy will probably stabilize a bit as the big impact of the fiscal austerity fades (but a new round of financial instability cuts the other way). The probability that Grillo actually gets some kind of mandate and then takes a radical path still seems low. The ECB's commitment to do what it takes should for now keep spreads from moving out too much. But the possibility of a dangerous outcome is real and one we're continuing to monitor.

So for all those scrambling to frontrun other lemmings in the global capital reallocation game, be it rushing into US stocks or Italian bonds, be careful: just because others are doing it, doesn't mean massive losses aren't lurking just over the corner.

Don't worry though, if all the bad news outcomes as forecast do hit, the ECB is prepared. After all, as was made abundantly clear yesterday, it has "No Plan B."

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Calidreaming's picture

fuckin Aliens cant stop the Madness- Moar Forward!

Ahmeexnal's picture

We can only hope and pray that Italy stands up to the rapist kleptocratic EU and dumps the euro.

redpill's picture

If Italy left, yes it would blow up the Euro.  That is why they won't be allowed to leave.

Groundhog Day's picture

Rumy and Draghi should do stand up together and really confuse the shit out of everyone

Jam Akin's picture

Italy has a decent manufacturing base and a lot of old money asset based wealth so my bet is that the common currency compliance will go on for a while. But...was there recently (after Cyprus story broke) and it was not easy to find an ATM with cash in it...and businesses are failing at a rapid clip.

NoClueSneaker's picture

Yupp - german press started the phase 2 on Grillo . For three weeks he has been a clown, now he progresses to be an "dangerous demagogue" who wants a absolute power ....

  Phase 3: Beppe Grillo The Terrorist ...


Groundhog Day's picture

Phase 4 : He hangs himself leaving a suicide note stateing he couldn;t handle the pressure of being in the lead.  Their is an investigation and the results are their has been no foul play.

Doomer's picture

@ Bridgewater:


TruthHunter's picture


??? Is a Jesuit Catholic?

CrashisOptimistic's picture


Can we stop with the bullshit?  Money is entirely artificial.  It did not exist in the garden of eden.  It did not exist in neanderthal caves.  It's not anything other than imaginary.

Nothing imaginary is going to be allowed to cause "this it is!!!"  If the imaginary something threatens mass death, then we will just imagine it different.  This applies to gold and bitcoins, too.  They are imagined to store the ability to buy calories and so since the buyer and seller imaginations are in sync, they can buy calories.

But do not delude yourself -- only the calories are real.  Only the joules in oil that bring the calories to your grocery store are real.

The rest is hand waving bullshit.

Dr Paul Krugman's picture

Like a bridge over trobled water....

Thank you for the good article Tyler.

_ConanTheLibertarian_'s picture

I never thought I'd be voting you up....again (same happened yesterday)! Did you finally see the light?

ParkAveFlasher's picture

I'm sorry but I'm genetically predisposed to junking Krugman.  It's chromosomal.

Clowns on Acid's picture

Hey fat Paulie - has dementia set in..or is there a noose nearby?

slightlyskeptical's picture

No he didn't see the light. it is simply that Europe's troubles make him think that the Fed is doing everything right just because what they are doing is different. The problem is there is more than one path to insolvency or to having that insolvency made public.

falak pema's picture

you count like man with forked tongue; its the FED whose counting is the most relevant and whose downturn will be the most awesome n inelegant. 

Remember how the bard sang for auld lang syne lost, land of the free : 

Once upon a time you dressed so fine 
You threw the bums a dime in your prime, didn't you? 
People'd call, say, "Beware doll, you're bound to fall" 
You thought they were all kiddin' you 
You used to laugh about 
Everybody that was hangin' out 
Now you don't talk so loud 
Now you don't seem so proud 
About having to be scrounging for your next meal. 

How does it feel 
How does it feel 
To be without a home 
Like a complete unknown 
Like a rolling stone? ...

A prize and nobility all gone with holy smoke like hopium of empire dreams...that is now a dronish scream, rhyming with the great Monsanto Rider decree; pale rider of oligarchy crime.

The conscience of a liberal...?

Where have all the flowers gone! 


bank guy in Brussels's picture

Yes, Italy dumping the euro would be a GREAT day of European liberation

One morning soon we may wake up to the surprising coalition ... Beppe and Berlusconi, together, putting aside their differences, for the one great task of saying 'BASTA!' to the euro

NoDebt's picture

Stop it.  I'm getting all misty.

WmMcK's picture

Anyone for a Au-backed lira?

flacon's picture

Draghi: "The Euro is irreversable." --> Could a banker lie?

Vashta Nerada's picture

I think what he means is that force will be used to keep things in line, if necessary.

kito's picture

hes not lying......they will do everything and anything to keep it glued...........they will turn every country into a vassal state, hollowed out and subservient, to ensure the eu goes on...........

NoClueSneaker's picture

Bit of narcissm and lot of drugs - bankster doesn't need to lie ... he belives the shit ...

hedgeless_horseman's picture



Bridgewater does not understand the political capital invested in Europe.  They vastly underestimate what the Euro means for the Europeans, for the Euro area.

malikai's picture

...said with that criminal grin.

prains's picture

what's the point of this article if it's clear at 0.000000000000001/2% of EU GDP Cyprhesss could blow up Europe and that couldn't be allowed either

NoDebt's picture

If ZH had a museum of modern antiquities THAT quote would belong in it.  It was burned into my brain the minute I heard it.  Apparently I'm not the only one.

That's gonna hurt SO bad someday when they beat him over the head with his own words- those words.

franzpick's picture

What the euro has meant to "Europeans" will soon be revealed as nothing more than utopian, unsustainable debt-binge expansion: one week of multi-national, M.E.N.A.-like, civil unrest will reveal how much trouble the euro then means to the eurocrats, and how little it means to marginalized national civilians.

Freddie's picture

Ray is a pretty smart guy.  I do agree that the powers that be in the EUSSR, bansketers and european bankster/gangster families will do anything to keep the euro alive.

The few Italians that I know in Italy do not like the Germans and they do miss the lira.   Just like in O muslim's Amerfrika - the states and countries like the "free" money they get from DC and Brussels.

Bam_Man's picture

Italy is more than big enough to blow up the entire global fractional-reserve Ponzi.

NoClueSneaker's picture

How about shitty Unicredit alone ??? Supermario Bross. offloaded all the €U-Junk into it - more than enough to stop the circus .

Bear's picture

Euro at 1.30, again ... It's all good again

jubber's picture

10y Italy 4.38%  !

I Am Not a Copper Top's picture

Shit will close green today.  Accept it and move on.

Watson's picture

The most important point about Italy and the Euro is that, for Italy, the threat that ejection from the Eurozone would result in chaos has no credibility.

If Greece/Spain go back to their old currencies, then no imported food, no fuel and probably military governments.

But Italy goes back to selling cheap white goods, and cheap vacations - no real problem.

NoDebt's picture

The threat of an erection from the Eurozone would result in chaos?

Oh, EJECTION, not erection.  Well, I guess that makes a little more sense that way.  Er.... maybe not.  I think I still like it my way better.


Freddie's picture

The evil bankster families, EUSSR, elites slammed Europe with the expensive euro and also Chinese imports hit about the same time.   Italy needs to tell them all to go F themsleves.  They can make it on their own.   Italy has survived in one form or another for 3,000 years.   Their biggest problem is demographics.  I will vounteer to help for Sophia Loren, Gina Lollabrigida types. 

Grillo is right.


WmMcK's picture

+1 - Cheap white goods - you mean like inexpensive washers and freezers, right?  I liked visiting the Med (but not when I was in the USN).

NoDebt's picture

Who cares about the Euro or Italian bonds?  The S&P is "well off the morning's lows."  Swear to God, Maria said it again.  So everything's cool.  We're good.


rp1's picture

Italy won't blow anything up.  France, on the other hand...

oleander garch's picture

Correction.  Grillo got the most votes on his own.  Bersani needed his coalition to get above the FiveStarMovement 

buzzsaw99's picture

Let's hope the Italian people still remember how to treat fascist pricks who lead them down the road to ruin.

noses's picture

Of course they know – they just send them off to run the ECB.

Bearwagon's picture

Wasn't there something like "If you want to do something, that will hurt people. That's why you do it over the weekend ..." uterred by dr. Strangelove (W. Schauble) recently?

I think so ...

NoDebt's picture

Ask any of the millions who have been laid off or lost their jobs during this fantastic "recovery" we're experiencing.  They know that gig well. 

You always let people go on a Friday.  Hand them their paycheck and let them cool off over the weekend.  Statistically, a much lower chance they'll come back in and spray the place with bullets if they have a whole weekend in between to get drunk and blow off steam.

bugs_'s picture

Could the Euro blow up Italy?  Ask the right question.

Evil Bugeyes's picture

The Euro seems to be walking through a minefield these days. So many problems and one misstep could be fatal.

On the other hand, one could argue that the Germans will always dribble out just the minimum amount of cash needed to keep things together at the very last minute. And if absolutely necessary, they will agree to printing as a last resort.

For the Germans, being in the EMU is like holding a tiger by the tail: you don't like it (and neither does the tiger), but you don't dare to let go. If the Euro collapses, so will the German banking system.

Bearwagon's picture

So shall it be written, so shall it be done!

edit: /sarc off