European Peripheral Bond Risk Explodes: Forget Brexit, "Now It's Italy's Turn"

Tyler Durden's picture

If there was any doubt that Brexit was "relevant" then the surges in European peripheral bond risk, despite massive bond-buying by The ECB, should send shivers up and down the status quo huggers that are shrugging the referendum decision off because "central banks will provide liquidity." However, it's not just The UK that EU officials need to worry about, as The Globalist notes, Germany will have to change its policies if it wants to avoid exit of other countries from the eurozone.

Portugal, Italy, and Spain are all seeing bond risk explode in recent weeks...


As The Globalist's Daniel Stelter explains...

“Please don’t go” pleads the German newsweekly Der Spiegel on its cover this week, asking the British to vote against Brexit on June 23rd. Indeed, especially from the point of view of Germany, Brexit would be a disaster.

We Germans would be left without a pro-market partner among the larger EU economies. After a British exit, the EU would be dominated by countries believing in the power of the state and the virtues of redistribution. The European Union would lose a pivotal voice of economic common sense without the UK as a member.

On more than 20 pages of coverage, Der Spiegel brings up many arguments in favor of a “remain” vote. Reading it all, one is left with the distinct impression that the supporters of Brexit have nostalgic memories of Britain’s glorious past and are more emotional than rational in their views.

Increasing economic tensions

Astonishingly, the major economic problems of Europe and the eurozone are left unaddressed. Wolfgang Schäuble, the German finance minister, can even claim in an interview that Spain, Portugal and Ireland “have overcome the crisis” and that “much also has happened in Greece.” Well, as we all know:

  • Greece is bankrupt, even as eurozone politicians continue their game of “pretend and postpone” when it comes to managing Greece’s debt mountain.
  • Spain is unable to stabilize its debt-to-GDP ratio even in the most optimistic scenarios and under the stewardship (until now) of the conservative party.
  • Portugal has a total debt load above the level of Japan (about 400% of GDP), paired with a shrinking population, lack of education and innovation and clearly bankrupt.
  • Ireland was and is competitive, but will never be in a position to pay off its huge private and public debt burden in an orderly way.

Only thanks to the ECB’s policy of quantitative easing and negative interest rates, has the eurozone not imploded until today.

Only thanks to the ECB, do countries with higher debts and poorer demographics pay lower interest rates on their debt than does the United States of America.

Unfortunately, the ECB can only buy time. It cannot fix the underlying problems of too much debt and diverging competitiveness.

Only the politicians could handle this problem, but they shy away from tackling it for fear of their electorates. Meanwhile, debt levels grow and imbalances remain as ever before.

Germany benefits from the weak euro

Germany, for its part, celebrates an ever-growing trade surplus, which is expected to reach 9% of GDP in 2016. This strength of the German economy is also an important aspect of the ongoing Brexit discussion. Only rarely is it stated as explicitly as in this comment in The Telegraph. The argument goes as follows:

The key to German success is this: it participates in a weak currency (whose value would collapse without it) enabling its exports to sell far more cheaply than had it retained the Deutschmark. Therefore, it continues to grow in economic strength relative to its partners – including us – but especially those in the Eurozone, notably France and Italy, who would benefit greatly from restoring the Franc and the Lira

Any net exporter in the EU also benefits hugely from the vast and incomprehensible welter of EU regulations on products and employment law, which keep external competitors at arm’s length and pile costs on them if they wish access to the single market.

“Germany is so rich, and getting richer at the expense not least of its partners,” states The Telegraph and comes to the conclusion that, “German domination of the EU means it has conquered without war, and signing up to the EU is signing up to the Fourth Reich.”

Leaving aside the overblown rhetoric, according to this view, a combination of currency dumping and unfair competition lies at the heart of Germany’s success. The solution can only be a limitation of Germanys export strength.

The problem with this argument is, like with all populist arguments, that it has a grain of truth in it. Germany has indeed benefitted from the weak euro in past years. Germans have focused on producing cheaper, not smarter, since the introduction of the euro, as per capita productivity gains have stalled.

Political tensions inevitable

JP Morgan already showed on 2012 that a divergence of economic performance led to tensions — and even war — in Europe over the past 150 years. For the purpose of illustration, I have added the analysis for today’s development:

Of course, there are many more factors leading to war. In contrast to British Prime Minister David Cameron, I do not fear another war in Europe should Britain vote to leave or the whole EU fall apart.

In addition, the divergence today is not as big as in past times. Still, we should take this indicator seriously. Clearly more seriously as German politicians are taking it now.

Given the overall development, it is no wonder that the public of Europe turns more and more Euroskeptic.

Only this spring did eurozone output manage to reach pre-crisis levels. Italy and Spain are still not there yet, while France is stuck in a never ending recession, or so it seems.

Where this turns potentially toxic is that the publics of other countries would like to have a vote on remaining in Europe, just like the British.

55% of the French and nearly 60% of the Italians would like to vote. 40% of the French and nearly 50% of the Italians would vote for an exit.

Of course, it remains to be seen whether such a separation, if it were to happen, actually led to an improvement in the national economic situation in the respective countries.

Many factors are domestic, but at the same time it can’t be denied that Germany’s failed euro policy is a mighty contributor to the worsening sentiments.


Germany’s export based model increases tensions

A key precondition for a recovery of Europe from the crisis is a rebalancing of trade flows. There was some progress in the past years, but the adjustment mainly took place via lower imports. Only Spain and, to a certain extent, Italy managed to increase their exports.

Meanwhile, the German trade surplus with the other eurozone members shrank, while it grew significantly with the rest of the world.

Of course, this is not only due to the weak euro but also the industrial structure of Germany, which benefits over proportionately from globalization and industrialization.

This one-sided focus on export-based growth has led to intensified criticism in Europe and the world, including from the U.S. Secretary of the Treasury, Jacob Lew.

German trade surpluses distract demand from foreign countries and amplify their problems. “Stealing” demand in a world suffering from underutilization of capacities naturally causes frictions.

Therefore, it would be in Germany’s own interests to lower the export surplus. Especially as every trade surplus is linked with a similar export of savings into the world. Most of the surplus of nearly 9% of GDP will be provided as credit to customers abroad, which are already highly indebted.

In a world suffering from too much debt, it is a dubious, if not stupid strategy, to export savings and risk not getting the money back.

It would be much wiser for Germans to spend that money at home to fix the crippled infrastructure and to improve our education system.

Failure of Germany’s eurozone policy

The refusal of German politicians to acknowledge the need for a debt restructuring, which by definition needs German participation as the main creditor of the eurozone, worsens the financial, economical and political damage of the failed euro project.

It is impossible to escape bankruptcy with austerity and reforms. The German policy try to rescue the euro is a complete failure. The vote on Brexit and the increased anti-Euro-feelings of the European public prove the point.

Change of course necessary

If the Germans really want to avoid a Brexit or the exit of other countries from the Eurozone, they will have to change their policies.

Unfortunately, German politicians and economists prefer to criticize the other countries instead of doing their homework.

They oppose spending more money at home, they oppose a debt restructuring, they oppose debt monetization by the ECB, they oppose exits from the eurozone. In doing so, they increase the pressure in the system as Europe remains locked in recession.

Irrespective of how the British vote next week, the problems of Europe keep on growing. It is only a question of when, not if, a euroskeptic party gets into power in one of the largest EU economies, promising to solve all problems by exiting the Euro and the EU.

I continue to see Italy as the prime candidate for such a move. The country suffers under a recession which has by now lasted longer than the recession of the 1930s. It still has not managed to get back to 2008 GDP levels.

Unemployment is high, government debt is out of control. Closing the competitive gap to Germany by lowering wages by 30% is a ridiculous idea and an impossible task.

The alternative is to leave the eurozone. Italy could then devalue the new lira and regain competitiveness overnight. An Italian uscita (exit) – or “Uscitaly” in the latest clever term of art – is the true risk for the eurozone.

And it would be too late when Der Spiegel comes up with a new cover: “Mon dio, Italia. Si prega di non uscire!”


And Germany has other problems too...

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
sudzee's picture

Interesting battle of 1309 going on in gold.

MillionDollarBonus_'s picture

The last time this happened in 2012, I made a buy recommendation for Italian and Greek bonds, and those who listened to me were rewarded with triple digit returns. Today's tumoil in Peripheral debt is another one of those rare opportunities that can make you rich with very little risk. The ECB is guarenteeing the liabilities of all EU member states, so this really is a no-brainer. Stop dreaming of getting rich - today is the day when you can take things into your own hands and finally make those dreams a reality.

froze25's picture

The only reason that the EU is breaking up is due to German and others unwillingness to acknowledge that the Refugee's are not compatible with the native populations and have no desire to be. That is what is causing this. Inept incompetence. Spending more than you have as a nation is also a major reason.

N0TaREALmerican's picture
N0TaREALmerican (not verified) froze25 Jun 16, 2016 10:52 AM


The refugee's didn't cause the corruption in the EU.   They just caused the white people to get pissed at the EU.   The EU was broken when it was formed (by white people, btw).

froze25's picture

So what, the refugees are responsible for over a 1000% increase in violent crime. The EU is a Nazi plan originated by Hitler. The Left has always been aligned with radical Islam since WW1. Sure white people implemented it but they did as sell out to the rest of the White population just like importing a aggressive population of Arabs/north Africans that practices a religion that promotes deception and lying to any non Muslim as good practice. There are plenty of people that aren't Muslim with dark skin that agree with this. More than white people are pissed at the EU. Wake up, the EU is being invaded and purposely being collapsed into a police state. The refugees are being used as a weapon to achieve this. Throw the weapon out.

WayPastCaring's picture

The same thing is happening in America, hence the rise of The Donald, as he has been the only presidential candidate willing to speak the truth about immigration, especially of Muslims. I am sick of the political correctness which studiously avoids mentioning the genocide of Christians in Islamic countries while extolling the virtues of 'peaceful' Muslims. If a religion is capable of producing such a high percentage of people willing to commit slaughter of innocents in its name, whose very existence is antithetical to freedom and democracy, who treats women like cattle and uses barbaric punishments in its court systems and practices a disgusting horrible form of 'law' known as Sharia, perhaps the West needs to stop and think about what they're allowing to happen to its citizens. The goddamned sellout politicians don't give a damn about us, not the elite, they've got theirs and they only want to hang on long enough to get more and not be the last in office (or even their own country when the collapse begins.

KnuckleDragger-X's picture

It's merely socialism, and the elitism that goes with it,taken to its logical endpoint. The thing that always amazed me was tossing away history, because in their brave new world it was going to be different this time.......

Carl Menger's picture

You are nothing but a scum. The ECB is stealing money through taxation in order for you to become rich. People must buy gold and bitcoin for honest profit. 

JohnGaltUk's picture

The game is up, the bonds are well and truely cooked and they are ready to blow.

Western nations have borrowed too much and soon the dumb arse investors will realise they will never get their money back.

Read history, you dont have to go to far back; 1932 in fact when all Europe Nations defaulted including China.

Central Bankers, I call them the plate spinners will NEVER beat the markets.

No fiat currency has ever lasted, oh but it is different this time isnt it!!!

Please look, the smart money is already converting from paper to tanigale assets, SF housing, Canada, Oz, Singapore etc etc.

Paper assets are pieces of paper backed by a promise, like sub prime loans, you have someones promise to pay and when push comes to shove they will always walk away, because the system is crooked.


Good luck to you, let me know how things work out for you. The rubicon has already been crossed a long time ago.


Best wishes to everyone.

BarkingCat's picture

You can argue that introduction of the Euro was a currency default by numerous countries disguised as a monetary union.

They go to extend the game of pretend by a couple of decades by swapping the game peaces and creating a new rule book.

BurningBetty's picture

The world got Hoodwinked!

nibiru's picture

Euro is suited for German economy only - the rest is just a periphery trying to use cheap credit - unfortunately, the Keynesian economics of spending your way to prosperity is backfiring now on nearly half of the Eurozone.

While all this is happening Germans are playing favours with Nord Stream 2, breaking their own sanctions - so it's not a surprise that the rest of Europe feels under the German boot. 

Draghi will try to save banks in Europe + bail-in directive but it's just too little too late. After Brexit, it actually may be that the EU is going to fall - and we all should hope for that.

Slomotrainwreck's picture

Germany will have to change its policies if it wants to avoid exit of other countries from the eurozone.


Maybe it's time change it's politics to sow the seeds of a GEXIT

JohnGaltUk's picture

Romour has it that the Duetch Mark has already been printed. How true this is will be displayed when you see the big money pile in to German equities and bonds because if the Euro collapse they know they will get paid out in Duetch Marks.

N0TaREALmerican's picture
N0TaREALmerican (not verified) Jun 16, 2016 10:49 AM


Re:  Only the politicians could handle this problem, but they shy away from tackling it for fear of their electorates. Meanwhile, debt levels grow and imbalances remain as ever before.


Didn't realize politicians could handle any problem, other than enriching their clients.

damicol's picture

I can solve Germanys problem. Shoot the fat unfuckable Stasi pig and feed the carcass to dogs

Wheel the fucking cripple over a cliff. Vote a half decent Govt and get the fuck out of EU too.

Instead of fucking whining at the UK

Sandmann's picture

Germans cannot govern themselves - it has never worked - something in the water in Berlin makes the German State suicidal

BarkingCat's picture

Must be as they weren't this stupid when the West German government was based in Bonn.

ironicmerman's picture
ironicmerman (not verified) Jun 16, 2016 10:52 AM

What was the widening catalyst on June 9?  I guess now's the time that these bonds are getting cheap and a good pickup, if you've got a strong stomach.

hibou-Owl's picture

Straight from the EU commissions website, they proudly state that the administration costs are only 6%.

They have 32,700 employees costing an average of 273,000 euro per annum.
A large proportion of that is handed directly to countries Dept of Agriculture who are also massive trough monsters.

It's an awful waste of money churning the merry go round, with very little to show for it.

As a French farmer I would be happy to remove all CAP, and have our compulsory MSA (health, pension scheme) paid for.

GEt RID OF THESE PARASITES and let us farm.

Troy Ounce's picture



CHS is one of my favourite writers and has a good story about the disaster of de-industrialisation. It has been posted just now on ZH:


"De-industrialization results when a citizenry is denied access to the tools and capital needed to produce goods, and when government subsidies sap the will to take the risks that are part and parcel of making real stuff."

Mountainview's picture

Even then, I can't see the link Brexit-Negative interest rates. Brexit is a geopolitical problem, negative interest rates are an issue of extreme, system-stressing easy monetary policy. Don't blame Britannia.

Kirk2NCC1701's picture

To avoid the Divide & Conquer effect, European countries and regions MUST coordinate their Secession voting, so that they occur on the same day throughout the EU.

Make Momentum your BNF. Best New Friend.

For when Secession fires burn everywhere at the same time, some are bound have deep consequences when the Establishment's Firemen get overwhelmed. IMHO.

Paul Morphy's picture

Ireland's GDP while nominal high, is massaged massively by international multinational companies booking worldwide activity to Ireland.

Irish GDP per capita is high as a result.


Irish Active Individual Consumption per capita (AIC) - as measured by the EU - is as lower than many of the top performing EU countries.

Italy's AIC is in fact higher than Ireland's.



Sandmann's picture

Germany used the Euro to suppress domestic living standards. You see it in shops - trash for the masses and luxury for the bankers. The middle class is destroyed like other countries and it used to live so well. The Euro allowed a shift in share of GDP towards exporters when an ageing German populatio should have become importers and lived better.

Instead Germany now has a Mega Housing Bubble which will wipe out the banks and homeowners. Some places have been selling on a 40-year rental yield

Dark Daze's picture
Dark Daze (not verified) Jun 16, 2016 11:35 AM

"They oppose spending more money at home, they oppose a debt restructuring, they oppose debt monetization by the ECB, they oppose exits from the eurozone. In doing so, they increase the pressure in the system as Europe remains locked in recession"

This states the problem in crystal clear terms and it has it's roots in the fundamental nature of the German. Some people will say great, the Germans are hard workers, innovative, savers etc., which while true, has always been a source of friction both ways between Germany and it's European neighbors.

There is little point in having the best house on the block if you are surrounded by a ghetto of dilapidated tear downs. And there is a natural and infectious anger that grows when a few people have a lot and most others have very little. That is exactly the problem that exists today in the US, so don't tell me you don't understand the nature of that.

Germany will not even fix it's own highways and roads, such has been the maniacal and puritanical devotion of the Merkel government to creating a frankly embarassing surplus, while other economies rot. And what they did and are doing to Greece has not helped their image one iota.

As long as Germany and German politicians continue on the current path they are on, I would say that there is no hope for a future Eurozone. The best that Germany can hope for is that the Norweigans, Danes, Swedes and possibly the Baltics don't mind being the ones who are dominated by them.

DaNuts's picture

Germany was responsible for the loss of the British Empire.

The E. U. is partly responsible for the demise of British industry

and has been piggy-backing for the last 30 years.

Looks like it is pay back time Adolf.

Youri Carma's picture

Wrong! Italy didn't devalue it's lira for competitiveness (they always overpriced their products anyways) but to inflate away their debts which now have to be payed by the rest of Europe. Italy will be the last to leave the Eurozone.