Italy Seen More Likely To Exit Eurozone Than Greece; Italian Bond Yields Surge

Tyler Durden's picture

In an unexpected reversal of (mis)fortune, this morning Sentix writes that the Eurocrisis creeps back into the heads of the investors in a new way: it is no longer Greece, but Italy which is now the country that is most likely to leave the Eurozone within the year from the perspective of the more than 1,000 investors surveyed. "This development underscores the importance of the referendum to the Constitution in Italy on December, 4th."

Sentix adds that while it looked as if a "castle peace" had been concluded a few months ago, the euro concerns are gradually rising again among investors. But this time it is not Greece that dominates the agenda. Although for example the pension funds in Hellas are collapsing, the euro exit probability has fallen to 8.48% - the lowest level since 2014.

Italy is now the focus country number 1 in the Eurocrisis! The precarious situation of the Italian banks, the political questions surrounding the Constitutional Treaty at the beginning of December, and the economic turmoil of the past have placed the country south of the Alps at the center of investor interest.

The above graph shows the historical dimension that is inherent in this signal. And it shows that this is not a one-off event, due to an up-to-date message, as we observed in the Netherlands, for example, after the Brexit decision.

Besides Italy, Sentix also measure a disadvantageous trend in Portugal. While the exit probability is not very high here, the EBI value worsens in small but steady steps. Thus, the risk of contagion as measured in the "Contagion Risk Index" also come back to the agenda.

And with the Italian referendum coming up fast, scheduled for December 4, the market is starting to noticed. Earlier today, Italy's borrowing costs hit eight-month highs with investors focused on political risks and stuttering banking sector reforms there as anxiety about other lower-rated euro zone nations has eased, Reuters writes.  The formation at the weekend of a minority Spanish government after a 10-month political stalemate has prompted markets to throw the spotlight east to Italy instead for what could be a nervy year-end.

The gap between Italian and Spanish 10-year borrowing costs - viewed as a key indicator of political risk - rose on Monday to 41.4 basis points, its highest since 2012. It hovered close to that level at 39.5 bps in early trade on Tuesday. 

Concern about Italy centres on a referendum on Dec. 4 in which voters will decide whether to approve Prime Minister Matteo Renzi's programme of constitutional reforms to reduce the role of the Senate and the powers of regional governments. Polls suggest Renzi may lose the referendum, "and that would be very bad news," said DZ Bank strategist Daniel Lenz. "Since Portugal passed the DBRS ratings test and Spain now has a minority government, Italy is where the risks lie," he said.

Last month, Portugal came through a DBRS sovereign credit review with its sole investment grade rating intact. Losing that would have made it illegible for the European Central Bank's bond-buying programme.

Meanwhile back in Italy all but one of 26 opinion polls published this month have put the "no" camp ahead, with a lead ranging from one to nine percentage points.  Renzi earlier this year said he would step down in the event of a "no". While he has stopped making that promise in recent months, he would come under huge pressure should he lose the vote.

With the outcome of next week's U.S. presidential election uncertain, the direction of the next ECB policy move on Dec. 8 unclear and a U.S. interest rate rise likely on Dec. 14, the timing of the Italian referendum alone could magnify market volatility.

In addition, and adding to the pressure facing Italian banks, Reuters also reported today that Veteran Italian banker and former industry minister Corrado Passera withdrew his rescue plan for the insolvent Banca Monte dei Paschi di Siena on Tuesday, accusing the bank of obstruction and ignoring the interests of its own shareholders. Passera's withdrawal leaves Monte dei Paschi, the country's weakest major lender, tied to a plan drawn up and backed by investment bank JP Morgan to sell some 28 billion euros ($31 billion) in bad loans and raise 5 billion euros in new capital.

Monte dei Paschi, which failed the European stress test over the summer, is desperate to complete the 5 billion euro cash call by the end of December, an ambitious target given that Italians are to vote on Dec. 4 in a constitutional referendum which could unseat the government and sour market sentiment. The attempted turnaround of Monte dei Paschi is the first big test of a state-backed campaign to steady Italy's banking sector and clean up 360 billion euros in problem loans.

"Ours was a serious proposal to turn around and relaunch the bank that would have given a key role to current shareholders," Passera said in a letter to the bank which was released to media. "We were denied the minimum conditions for proceeding."


Passera said in his letter that he had assembled investors willing to invest around 2 billion euros in the bank. He did not name the investors, saying he had been prepared to identify them if Monte dei Paschi signed a confidentiality pact.


But a spokesman for Passera said the bank had asked for so many restrictions to be included in the pact they had not got round to signing it.

Finally, as reported before, and adding to the country's troubles, another powerful earthquake struck over the weekend in the same central regions that have been rocked by repeated tremors over the past two months. The government recently cited earthquakes and the influx of migrants as reasons for submitting a budget plan to the European Union that would increase Italy's structural deficit. 

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RaceToTheBottom's picture

Italy will try and leave before the Euro Banksters get their hands on Italian Gold.

Then the solution to Euroland (Rich Euro/Poor Euro) will surface.

gladih8r's picture

Scheisse, no Muzzies for you ! ! !

Haus-Targaryen's picture

While economically two Euros would be quite advantageous to everyone involved, it destroys the "we're all the same narrative."  

Additionally, in which group would you put Eastern Europe?  

They have similar funds on an individual level to the PIIGS but are savers like the Germans?  

Do you create a third Euro?  At this point, if we are splitting up the continent into different blocks, why have one political block and smaller financial blocks at all?  Why not just split the whole thing up? 

Jubal Early's picture

Why not just split the whole thing up? 

Ditto the US

Haus-Targaryen's picture

Agreed.  Should be split up into AT LEAST four different countries. 

RaceToTheBottom's picture

Not sure.  Obviously, I am not there and splitting into smallest viable units (countries) would force lots of bilateral arrangements.  Countries with business arrangements, and think alike, like Slovakia and Germany would get those sorted faster than those that have none.  

You would have thought that the pressure to break up would have stopped the bureaucrats some but it seems not....

Silver Bug's picture

The entire Eurozone is going to continue to fracture and splinter. It deserves exactly what is happening to it. The bearucrats in Brussels are finished. Their days are numbered.

Mimir's picture

Sounds like a prayer. You also believe in ghosts ? 

gojam's picture

Italy won't go as long as there is 'free stuff' to be had.

kliguy38's picture

 a few more quakes and i think they'll surrender to the EU

gojam's picture

Yep, maybe they shouldn't have opened Christ's tomb in Jerusalem...

It's all starting to look like the plot of a supernatural horror movie

MPJones's picture

It is now clear beyond doubt that whereas the EEC free trade area was a good idea, a "United Europe" is not, and the euro is an unmitigated catastrophe. Back to the drawingboard now, and make a comprehensive free trade area building on what progress has been made over the past 40 years or so, and discard the parts that don't work, including most of the bureaucracy, certainly including the anti-democratic commission. Then Europe may have a future.

GreatUncle's picture

You would think ... problem is the trade part was to sucker the populations in is all, the end goal always was the EU superstate ruling over all the nations of europe by the elites.

Yet to meet any elite, but I don't think they will be the brightest and best, their by privilige and why the EU will end up a disaster and a dictatorship.

quasi_verbatim's picture

While La Bella Italia has a Golden Squid PM the possibilities of breaking out are not good.

larz's picture

I hope for the Italian people's sake that they can endure the short term pain  (on top of the earth quake decimation) of exiting the centrally planned bureaucratic globalist deathwish that is the EU 

Synoia's picture

How can Italy leave the Euro when it needs years to change its Banking Software for a reversion to the Lira? Or the Good/bad Euro?


It is not the will or desire which is the problem, but the implementation.


Nope, the Germans are stuck with the Italians, and the Italians wih the Germans. Next step: Asset stripping a la Greece.


What to buy a sightly used Colesuem? Buildings by Michaelangelo? Much Renaissence Art? One used Palace of Constanstine?


Lady Jessica's picture

Putting the inherent problem of trade asymmetries in the EZ aside, for those wishing to manipulate the EUR lower, the PIIGS saga is the gift that keeps on giving.  Just as with BREXIT and the GBP.  (Deutsche Bank may be a variation on the theme).

Haven't we discovered that in a world of multilateral fiat printing, debauching your currency may not stop it from rising in value.

So we need escape valves to protect trade competitiveness.  What's the USD's?

Lady Jessica's picture

Part of the toolbox maintaining the "soft peg" in place since Mar/Apr 2015.

h/t to Quantum Bunk.

larz's picture

We have no cohesive  plan in the USSA for the USD, foreign policy or anything else outside of lying and manipulations. There is a leadership void except for corporate whores.  Have you not been paying attention?

Bam_Man's picture

Aren't all these earthquakes GREAT for the italian economy?

gojam's picture

Earthquakes are Keynesian 

ali-ali-al-qomfri's picture

italy is really suffering, earthquakes destroying the landscape and banksters the rest.

temblors felt around the world.

WTFUD's picture

Take a look at Luxembourg's External debt which is around 4 Trillion Euros; 3.8 Million euros Per Capita. Compared to Italy 2.9 Trillion External Debt and 40k euros per capita.

Now who's kidding who about the BASKET CASE OF THE EU PLAYING MUSICAL CHAIRS ON THE COSTA CONCORDIA in Tuscany with Captain Francesco Schettino, jumping ship.

It's all one giant PONZI folks.

boodles's picture

So, what's the margin-of-fraud in Italy's elections?  Pretty high?  

I'd be worried that the Italian establishment will rig the polls to ensure their victory in December.  

oncemore's picture

Germany will follow immediately after Italy. The most stupid  one will abandon Euro as the last one. I am somehow convinced, that this will be the Baltic countries. And it is very O.K. 

hound dog vigilante's picture


Hugh Hendry's latest parlay already paying-off in spades...


bluskyes's picture

Perhaps the earthquakes will allow the Europe to back-door some money to them through "disaster relief"

assistedliving's picture

just back from Italia.  Crawling w/ tourists from Roma to Napoli and up the Amalfi.  Crawling.  Anecdotally, from driver, antique dealer,

Sommelier, concierge, without fail, EURO benefited Germany over ROE; especially Italy according to the Italians.

Question:  Buy DB or MPdS?

the answer is Italia's problem to solve and for the life of me I can't see my way around it.  Median age = 44 and...

NO ONE WILL ALLOW ANYONE TO TOUCH THEIR EXTREMELY GENEROUS PENSIONS.  Meantime, all the jobs are held by 50+ year olds

and the kids live at home dreaming of coming to Hollywood, i mean Amerika