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Will Italy Re-Denominate Back Into Lire?

Tyler Durden's picture




 

We have discussed this a few times over the last year and as Greece begins to show signs of defection, it is perhaps worth considering what a spoiled and chided sovereign might do in a temper tantrum. Peter Tchir, of TF Market Advisors, puts it best this morning: "Everything I have read over the past couple of weeks coming out of Italy, tells me that if there was one country prepared to "screw" the Euro and go it alone, it would be Italy.  They don't like Merkozy treating them like children, and they have a big enough economy that a dirt cheap Lire would make exports possible".

 

Italian 5 year bond yields hit 6.24%   that is 37 bps higher on the day.  The spread to bunds moved 56 bps.  10 year Italy "only" yields 6.32% - that is getting scary flat.  The front end isn't as flat, but 2 year Italian yields spiked to 5.5% (55 bps on the day).

If Thursday didn't teach us that you can't let price action tell you whether a "grand plan" is good or not, I would watch this very carefully.  Yield curve flattening is a big deal and a critical step in the deterioration of the credit worthiness of an entity (the 1st loss from the EFSF may be gaining in value, but who wants the more and more likely 2nd loss?).

I once again would be concerned about getting too short Italy via CDS.  It looks like Italy could re-denominate the debt (as a G-8 country) back into Lire and it would NOT be a CDS Credit Event.  It might be a lot of other things, but Credit Event is not one of them.  Everything I have read over the past couple of weeks coming out of Italy, tells me that if there was one country prepared to "screw" the Euro and go it alone, it would be Italy.  They don't like Merkozy treating them like children, and they have a big enough economy that a dirt cheap Lire would make exports possible, and while foreigner bond holders might lose on a forced convergence to Lire, Italian banks and pension funds could at least pretend they are getting paid in full.  China did send delegates to Italy not so long ago, if I remember.  Maybe it wasn't part of a save Europe project, as much as it was a what bargains can we find in Italy trip?  A really strong Deutsche mark might not even both export oriented China as it would make German goods less competitive at the time China is trying to step up their manufacturing to a higher level of quality.

Germany may regret wasting the last 18 months trying to save the Euro and not doing enough to save themselves.

This scenario is clearly far fetched, but if we are going to think out of the box, not every possible outcome is good.  And this would be good for Italy and China.

 

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Tue, 11/01/2011 - 09:36 | 1831806 Iriestx
Iriestx's picture

Apparently there's absolutely nothing in the world that qualifies as a CDS credit event.

Tue, 11/01/2011 - 09:38 | 1831818 sqz
sqz's picture

Indeed.

Tue, 11/01/2011 - 09:40 | 1831832 youngman
youngman's picture

Oh I bet the IRS figures out some way to say you were paid off...even though you were not...a paper gain...or something....a new rule number 12943756581918w375t537391..and a new form too

Tue, 11/01/2011 - 11:21 | 1832409 gmrpeabody
gmrpeabody's picture

+100

Tue, 11/01/2011 - 11:56 | 1832618 the mad hatter
the mad hatter's picture

more like liar *ba dump cheek*

Tue, 11/01/2011 - 09:45 | 1831884 HoofHearted
HoofHearted's picture

And people still can't figure out that any fiat is going to leave them screwed. Back up the truck, because that "eureka" moment is going to come soon in Euroland. And eventually Americans will understand it also.

Tue, 11/01/2011 - 09:51 | 1831926 monkeyboy
monkeyboy's picture

Well that'll certainly make things interesting!

Tue, 11/01/2011 - 11:19 | 1832400 gmrpeabody
gmrpeabody's picture

Interesting to say the least!

Grab a beer and pull up a chair.

Tue, 11/01/2011 - 09:55 | 1831944 Iriestx
Iriestx's picture

Fiat?  I don't even know what that is.  I don't have time to learn, I have to set me DVR to watch Dancing with the Stars while I watch the E! miniseries about the Kardashian divorce and I almost forgot about tending my farmville crops on facebook..... 

 

What were you saying?  

 

The average American wouldn't understand the situation, or even care to understand even it if squatted over them and took a shit on their chest.

Tue, 11/01/2011 - 10:18 | 1832062 Spitzers Black Socks
Spitzers Black Socks's picture

Average American wiping shit off his chest: "Isn't it that tiny car that's suprisingly big enough to accomodate J Lo's ass?"

Tue, 11/01/2011 - 09:39 | 1831823 trav7777
trav7777's picture

hey, they are nice fantasy instruments to "trade" that have no connection to the real world.

this whole notion of using FX to make your exports more competitive...what bunk.  Especially in fiatville, it just leads to poverty and war

Tue, 11/01/2011 - 09:54 | 1831931 Ghordius
Ghordius's picture

"this whole notion of using FX to make your exports more competitive...what bunk"

exactly, on the long run FX devaluations don't help you at all

--------

PM Berlusconi might perhaps even want to go back to the Lira but for the moment it will be very hard to find any majority in Italy, both left and right. Particularly on the left.

Tue, 11/01/2011 - 10:07 | 1832022 FeralSerf
FeralSerf's picture

Italy doesn't have political majorities. It has coalitions. It's just a matter of placing one's bribes (or bets if you prefer) in the correct places.

Italy, unlike the other PIIGS except perhaps Spain, can produce everything that is necessary to feed, clothe, and move itself except perhaps some fuel that can be traded for a few Ferraris. They don't need the Germans.

Thu, 11/03/2011 - 02:51 | 1839980 defcon
defcon's picture

That was a funny joke "except some fuel perhaps". The major part of italy's electricity production is from oil. Most of transportation infrastructure run on oil. Italy doesn't have a chemical industry anymore. And what about gas? Contrary to what you might think, although we have a long warm summer we also have a real cold winter. Also modern agriculture is based on artificial fertilizers which are made mainly using natural gas. Only that delusional of Mussolini could think of makin Italy self-sufficient, and it didn't really work (and it was 70 years ago, quite a different world...). If Italy would go back to Lira the cost of buying oil and raw materials on the market will produce hyper-inflation in a few months

Tue, 11/01/2011 - 09:55 | 1831949 qussl3
qussl3's picture

The Chinese would like to have a word with you about that.

Although even they would admit that even they are reaching the limits of that particular scam.

Tue, 11/01/2011 - 09:41 | 1831833 CClarity
CClarity's picture

The banksters lawyers are clever indeed with their wording.  If this happens, the banks win.  If that happens, the banks win.  Thanks for paying your fee to us for CDS "insurance" when we've rigged the game.  Love those pocket lining products.  Bankers are gonna need to go back to the 3-piece so they have extra pockets in the vests as the raids pick up.

Tue, 11/01/2011 - 09:50 | 1831918 Mercury
Mercury's picture

Damn, why didn't AIG think of that...

Tue, 11/01/2011 - 09:46 | 1831894 semperfi
semperfi's picture

Suckerz!  And all you CDS boys & girls thought you could out-do The Syndicate? Really?  HAHAHAHAHAHAHAHAHAHA!!!!  SUCKAZ!!  Get physical bitchez.  as in physical silver, gold, ammo, grub - paper is gonna burn bitchez, CDS paper bitchez - HAHAHA!!!

Tue, 11/01/2011 - 09:37 | 1831812 trav7777
trav7777's picture

Apocalypse, bitchez

Tue, 11/01/2011 - 09:38 | 1831819 Note to self
Note to self's picture

NEIN NEIN NEIN!!!

Tue, 11/01/2011 - 09:42 | 1831849 kaiserhoff
kaiserhoff's picture

Redominate?  I think so.

Berlusconi could use a good dominatrix about now.

Tue, 11/01/2011 - 09:45 | 1831838 cowdiddly
cowdiddly's picture

My PAPY said Son yer gonna drive me ta drinkin, if ya don't stop drivin that HOT--ROD-- Lincoln.

Commander Cody

Ill take the 10 yr  Doucheland Bundos for +13.5 and some Ag for 32 Alex.

Tue, 11/01/2011 - 09:46 | 1831890 disabledvet
disabledvet's picture

Actually this has been my theme song two years runnin':
http://www.youtube.com/watch?feature=player_detailpage&v=952h-AJ3Bcg
looks like i'm not alone!

Tue, 11/01/2011 - 09:57 | 1831947 cowdiddly
cowdiddly's picture

Well we could play Dueling Banjos and say SQUEAL LIKE A PIIG BOY

Pling pa pling pling pling pling pling pling pling

Tue, 11/01/2011 - 09:42 | 1831845 Tsar Pointless
Tsar Pointless's picture

I think what Tyler is trying to say is:

"Arrivederci", European Union!

Tue, 11/01/2011 - 09:43 | 1831856 fadgadget
fadgadget's picture

italy could quickly go rogue.  quick export help from iran and syria.  ding, ding, ding.

 

http://en.wikipedia.org/wiki/List_of_states_with_nuclear_weapons

Tue, 11/01/2011 - 09:43 | 1831865 Vlad Tepid
Vlad Tepid's picture

That's a SPICY a-meata-ball!

Tue, 11/01/2011 - 09:43 | 1831870 Whoa Dammit
Whoa Dammit's picture

It's the end of the EU as we know it.

Tue, 11/01/2011 - 09:45 | 1831878 apberusdisvet
apberusdisvet's picture

 

 

New porn fiat coming; bring back the lions in the Collesium; cover the politicians with sheeple blood before tossing them in the ring; would be greatest PPV event in history; here's my $239.00 (plus tax).

Tue, 11/01/2011 - 09:46 | 1831888 Sudden Debt
Sudden Debt's picture

Those Italians seem to like to screw everything... but even Merkel? ARE THEY FUCKING BLIND?!!

 

Tue, 11/01/2011 - 09:52 | 1831929 disabledvet
disabledvet's picture

this would be total suicide. Plus "there's an American Naval Base in Naples." Oh, and we just invaded Libya which is in total chaos. complications, complications, complications...

Tue, 11/01/2011 - 10:23 | 1832087 snowball777
snowball777's picture

shudduppayouface and let em settl'a the bet-ta.

Tue, 11/01/2011 - 09:48 | 1831907 Josh Randall
Josh Randall's picture

Meanwhile back at the Printers...

Tue, 11/01/2011 - 09:50 | 1831915 Gene8696
Gene8696's picture

Time to smoke a Jeffery, and stroke the furry wall...

Tue, 11/01/2011 - 10:00 | 1831980 Lord Peter Pipsqueak
Lord Peter Pipsqueak's picture

fi·at/?f?ät..noun.

1. A command or act of will that creates something without or as if without further effort.

2. A shit Italian car. 

Tue, 11/01/2011 - 10:03 | 1831999 vegas
vegas's picture

I said in an earlier post - Lira here we come! Wasn't kidding. Is a definite possibility considering TD hit the nail on the head about Italian politico attitudes towards Merkozy gang.

Oh how I pine for a return of the different currencies - what trading opportunities.

I got to go take a cold shower before ........... OMG!

Tue, 11/01/2011 - 10:06 | 1832013 Kinskian
Kinskian's picture

Italians following the German lead never ends well for either. After all is said and done, Italians just aren't Germans.

       http://www.youtube.com/watch?v=aXHn7Fn97Ss

Tue, 11/01/2011 - 10:06 | 1832019 Melin
Melin's picture

Given that many in the various EU countries used and remember their old school money, it seems it would be psychologically easier to revert than it would be to say, change one day out of the US dollar into something different for Americans. Is that correct and would it mean that if one country starts printing and circulating their own again, all the various printing presses would hum along after the first domino fell?

Tue, 11/01/2011 - 10:12 | 1832039 EasterBunny
EasterBunny's picture

If they redenominate into lire, what about corporate bonds issued in EUR? Can corps also redenominate? If not, paying back EUR with devaued Lire will be pretty difficult

Tue, 11/01/2011 - 10:16 | 1832054 eurusdog
eurusdog's picture

Not sure what you are all worried about? The EURUSD in the last hour has rallied almost 40 points! (Sarc) Hold those EUR shorts!

Tue, 11/01/2011 - 10:21 | 1832081 snowball777
snowball777's picture

I have decided to redenominate my debt in used condoms and broken promises (rated by Moody's slightly better than broken condoms).

Don't worry, dear; it's only temporary inflation!

Tue, 11/01/2011 - 10:58 | 1832278 jmcadg
jmcadg's picture

He who jumps first wins.

Tue, 11/01/2011 - 11:55 | 1832613 SDRII
SDRII's picture

The leak about Berlusconi started long before the bond sqeeze. FT article suggesting berlusconi running to Putin bday says it all. He is perceived as too close. Wikileaks, Bunga bunga /tax scandel (Ozawa like), Italy opposition to Libya (call for halt) and Nabucco vs. Sud Stream etc (Eni). Berlusconi is a liability as Putin comes back into power in 2012 (berlsuconi ends term 2013). lay out the timeline. Hard to miss this with all that is happening in MENA &  Missile Defense (NATO/Russia) & Vatican

Tue, 11/01/2011 - 12:11 | 1832700 glepo
glepo's picture

Would be fun to see Sarkozy to deal with the French banking system.... (but wont happen, Lagarde IMF chief rings a bell!)

Total Gov net liabilities (from SG study) + private sector debt % GDP:

France 549% / 155% (AAA)

 

Germany 418% / 128%

Italy 364% / 121%

UK 442% / 215%

 

Spain 244% / 171%

US 541% / 174%


A large wealth tax–and some have spoken of sums larger than €200 billion–could knock Italy’s public debt ratio down to 80% of GDP leaving total-economy debt where it is now, putting the country’s metrics on the level with some triple-A countries.


From CS study

 

Italy choose to leave  Italy has a large number of advantages over the rest of the periphery: Italy runs a primary budget surplus  (thus it would need to tighten less), net foreign liabilties are small (thus preventing a massive default of  the private sector), borrowing from ECB is only 5% of GDP, the country is a net contributor to the EU budget  and it has a big industrial base thus benefiting more from a cheaper currency). Clearly the cost of srvicing the public debt (120% of GDP) would soar (assuming the BTP/bund spread rise  to the pre-EMU level of 6%, Italy's interest costs would be c 8% of GDP cf 4.8% now, thus taking c 1.5%  off GDP growth; however, with an average maturity of 7.2 years and only 20% of debt coming due within  the next year, higher funding costs would only come trough with a lag). The cost/benefit of Italy leaving the Euro looks a lot less clear-cut than the rest of the periphery. the problem in our view is that if a big exporter like Italy left the Euro, that would put the rest of peripheral  Europe under huge deflationary pressure (to try and stop foreign capital and export market share going to Italy) and it is very hard to see how other members of the periphery would not join Italy.

Italy’s total economic debt is not high by euro-zone standards, and roughly the same as Germany’s. But that’s because private debt levels are low–and wealth levels high–while the state is hobbled with €1.8 trillion in debt 

Yet Italian households have financial assets worth an estimated 180% of GDP and unmortgaged real estate worth more than 300% of GDP, and yields on these assets are far lower, posing a net drag on the economy as a whole. That’s extremely inefficient given that senior bankers are warning loudly of an imminent credit crunch given they can’t make profitable loans given their funding costs are rising with Italy’s sovereign yield.

 

Households’ net wealth, i.e. the sum of real financial assets (property, businesses and valuables) and  financial assets (deposits, government securities, shares, etc.) net of financial liabilities (mortgage loans  and other debts), has a median value of €153,000 in 2008. In real terms, after growing by about 44 per  cent between 1993 and 2006 thanks mainly to the rise in the value of real estate, the median diminished  by about 1 per cent in 2006-08

 

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