Italy

While it is unclear if the ECB intervened in the second Italian bond auction of the week (we will know better over the weekend when the ECB provides the weekly change in its bond purchasing program), the much anticipated issuance of 5 and 15 year bonds is now in the rear view mirror. As Reuters says, "Italy sold almost 3 billion euros of medium- and long-term government bonds on Thursday in a sale which analysts said went well although the Treasury had to pay the highest premium on record to sell 15-year paper. The gross yield on the 5-year BTP jumped to 4.93 percent, the highest yield in auction since June 2008 and compared with 3.90 percent in the last auction a month ago. The new 15-year benchmark drew bids 1.49 times the amount offered and a gross yield of 5.90 percent, the highest on record. The auctions were seen as a key test of market appetite for the country's debt after it got sucked into the debt crisis, sending its benchmark 10-year yields briefly above 6 percent on Tuesday for the first time since the euro's launch in 1999." The prior 5 and 15 year bonds priced at 3.90% and 5.34% respectively, and 1.28 and 1.33 for the Bid To Cover. Yet with the 15 Year trading at 5.99% just prior to the auction, it does seem that there was a positive surprise. We will bring you any stories of ECB or Chinese intervention as we see them.

One of the main catalysts for today's European market action was the Italian 1 year Bill issuance which was supposed to set the tone for Italian bond demand, especially since thanks to ISDA's stupidity (which had made it clear CDS will not trigger in any event as the organization is completely spineless), there is no reason to any longer hedge a negative basis at issuance. Well, Italy did pull it off, although at terms that a month ago would have inspired shock within the market. "The 6.75 billion euro sale was the first test of appetite for Italian paper since a surge in nerves that it will be next to fall in the euro zone's debt crisis due to domestic political tensions and a combination of high public debt and low growth. The gross yield on the 12-month BOT bills rose to 3.67 percent from 2.147 percent at a previous auction in June. This was the highest level since September 2008, according to Reuters calculations on Italian Treasury data. The bid-to-cover ratio fell to 1.55 times from 1.71 in June, when the treasury sold a slightly lower 6 billion euros in total." However, even this data was very suspect after 10 Year Italian-Bund spreads hit a new record wide of 355 bps earlier as the Italian contagion is now fully on. In response, both the ECB and China are now rumored to be scooping up all peripheral bonds in the secondary after a long hiatus as the ECB is on the verge of panicking, side by side with European bond investors, following remarks by Dutch Finance Minister De Jager who said, as predicted yesterday, that a Greek selective default "Is not excluded anymore."

Oops:

• INTESA SANPAOLO SPA <ISP.MI> SUSPENDED FROM TRADING LIMIT DOWN
• UNICREDIT <UCG.MI> SUSPENDED FROM TRADING LIMIT DOWN

Bank holiday limit up?

The farce is now complete, as the Chinese rating agency Dagong, which was the first one to downgrade the US, reminds the world it is there to lend its weight in destabilizing the ponzi house of cards. From Dow Jones: "Chinese ratings agency Dagong Global Credit Rating Co. said Monday it is putting Italy's sovereign debt on negative watch for a possible downgrade. The Italian government's debt accounts for 119% of gross domestic product, with most of the debt coming due in the next five years, Dagong said in a statement. Dagong has often issued controversial ratings. In November last year, it cut its rating on the U.S. to A+ from AA, with a negative outlook. It ranks the U.S. as a riskier borrower than China. Italian debt is in focus at the moment, as spreads between 10-year Italian and German bond yields reached a record 2.47 percentage points on Friday. Dagong said in its statement that it will downgrade Italian debt if the government's debt-financing costs continue to rise. "(Italy's) financing needs are huge each year, and the debt burden of the government will be seriously constrained by financing costs," Dagong said. Dagong gave Italy an A- rating with a negative outlook in June 2010." Who could have possibly thought that Italy's surging issuance load over the short term could be an issue. Oh wait... And yes, the irony that China, which as of this morning has telegraphed it is just as helpless in controlling the global liquidity implosion as everyone else, is downgrading another insolvent country is not lost on us. But yes, earlier Dagong did announce that that Moody's report on local government debt is "unfounded" and "vicious." Perhaps the most ironic thing is that the rating agencies got us here... And they will be those who get us out (courtesy of the escalating downgrades to the global reset ushering bottom).

The earlier news that Italy's regulator may forbid naked short selling in a desperate attempt to preempt the bond vigilantes from taking down the country's financial system (how shorting stocks prevent evil speculators from selling bonds is somewhat confusing) has been confirmed. But that's just the beginning. The latest twist is that the Consob has also requiring shorts to immediately disclose their short positions "in an effort to increase market transparency." Odd how shorts are never required to be exposed when the markets are surging (or how silver margins have yet to be reduced despite the near 40% price drop in the metal from recent peaks). It gets worse: from Bloomberg: "The European Securities and Markets Authority, which co- ordinates the work of national regulators in the 27-nation EU, should be given emergency powers to temporarily ban short selling or trades in CDS on sovereign debt in the EU, the Parliament said. The Italian regulator said short sellers must disclose their net positions when they reach 0.2 percent or more of a company’s capital and then make additional filings for each additional 0.1 percent."

Once again the great diversionary scapegoating of speculators begins, after as Il Sole 24 Ora reported that the Consob, or Italy's regulator, may enact a naked short selling ban as early as tonight. The premise is that it is the shorters who are responsible for the ruinous state of the global ponzi. Not the fact that it is a, well, global ponzi. Distraction 101. And yes, it did not work back in 2010 when banning naked shorting was implemented in other European countries, it will not work this time either. But it won't stop bankrupt governments from trying. To wit: "Commissioners will assess the situation before markets open Monday, said a Consob spokesman, who declined to be named in line with the regulator's policy. Commissioners may decide to restrict "naked" short-selling in line with similar decisions taken in other European countries, he said.... The Consob meeting occurs after shares of Italy’s biggest banks fell to the lowest in more than two years on July 8, and government bonds dropped, driving 10-year yields to a nine-year high." 24 Ore adds: "Consob intervened several times in the past on short selling after the collapse of Lehman Brothers to protect stock markets."

The latest italy contingency stunner comes from Die Welt which has just reported that the European rescue fund will be insufficient to bail out the latest biggest loser in the game of musical ponzi chairs, Italy. As Reuters translates: "The existing rescue fund in Europe is not sufficient to provide a credible defensive wall for Italy," the central bank source was quoted telling the newspaper in an advance text of an article to appear on Monday. "It was never designed for that," the source added." The newspaper said that the rescue fund might have to be doubled to up to 1.5 trillion euros. But it was not clear if it was the central bank source calling for the increase." Doubling the bailout fund is not a new idea and was previously proposed by Nout Wellink of the Dutch Central Bank, although as Die Welt explains, the decision will ultimately be not that of the ECB but of the separate governments. Germany, as a reminder, is already the biggest backstopper of Europe, and is on the hook for €211 billion euros as the primary funder of the EFSF: which just happens to be the CDO at the heart of the eurozone. Should Germany have to add another 200 billion euros to its rescue commitment, Merkel can forget any and all reelection chances, which is funny since just today it was announced that "Chancellor Angela Merkel has stated publicly that she wishes to run again in 2013. This comes as polls show she would face strong challengers from the opposition Social Democrats." Her chances would be roughly zero if German taxpayers learn that the fate of a failed monetary experiment is increasingly more reliant on their direct labor even as the populations of "austere" countries refuse to work and merely subsist on existing entitlements.

As was reported last week, Europe has suddenly found itself shocked, shocked, that the bond vigilantes decided to not pass go and go directly to the purgatory of the European core, in the form of the country that, at €1.5 trillion euros, has more debt than even Germany, but far more importantly, has a debt/GDP ratio of over 100%, and has the biggest amount of net notional CDS outstanding (not to mention that it has dominated Sigma X trading for the past several weeks). Italy. On Friday we explained why things are about to get really ugly for the boot as a flurry of bond auctions is now imminent. Which is why it was not surprising to read that tomorrow morning the European Council has called an emergency meeting "of top officials dealing with the euro zone debt crisis for Monday morning, reelecting [sic; we assume Reuters means reflecting] concern that the crisis could spread to Italy, the region's third largest economy." Newsflash: the crisis has spread to Italy. And it will only get worse at this point as Spain is largely ignored for now (until its own mortgage crisis starts making daily headlines like this one, however, where courtesy of the insolvent Cajas which are simply a GSE waiting to be nationalized, the can will be kicked down the road for at least 6-9 months ) and the vigilantes start dumping Italian debt and buying up every CDS available and related to Italy. "We can't go on for many more days like Friday," a senior ECB official said. "We're very worried about Italy." But, but, didn't Draghi just say Italy's banks will pass the second, "far more credible" stress test en masse? Welcome to the second, and final, part of the European insolvent dominoes contagion, the one which culminates with everyone bailing each other out... and the death of the euro currency of course.

Much hollow rhetoric has been uttered about the vast existential threat presented by Greek CDS. As we have reported, Greek CDS is the least of Europe's problems. When it comes to the stability of the European dominoes, it is and has always been about Italy, which is not only the second worst country in Europe after Greece on a debt/GDP basis, and also the country with the largest amount of nominal debt, but more importantly has the largest amount of net CDS outstanding. All this is summarized on the Bloomberg chart below.

It was only last week when rumors that Italy's Finance Minister Giulio Tremonti was about to step down due to irreconcilable difference with the man who puts DSK's (alleged) sexual exploits to shame, pushed down Italian bank stocks. Today, The Guardian picks up where last week left off, and brings us the following scene from a real life version of The Office, wherein we learn that Tremonti, who now is hated in Italy and will soon join the Greek Finance Minister in being the target of a massive scapegoating campaign that will likely end in his termination, has just threatened to quit if calls for his resignation don't subside. Yes, it didn't make much sense to us either but whatever.

Yesterday, the Italian government introduced additional fiscal austerity measures that aim to reduce the general government deficit by €47 billion (3% of 2011 GDP) by 2014. Despite these measures, however, we believe substantial downside risks to the government's debt-reduction plan remain, primarily due to Italy's weak growth prospects. in light of Italy's weak growth (per capita GDP growth averaged minus 0.9% between 2005 and 2011) it is our opinion that far more substantial microeconomic and macroeconomic reforms will be required to incentivize private investment and match wage levels with productivity. Without such measures, we believe Italy's economic potential will not be realized. This will imply insufficient wealth creation to deliver meaningful declines in the general government's debt-to-GDP ratio, which was a high 119% at end-2010. As a consequence, we continue to hold the view that there is an approximately one-in-three likelihood that the ratings on Italy could be lowered within the next 24 months, as reflected in our negative outlook.

Italian banks and other companies refuse to relinquish the top volume spots on the world's most active dark pool, Goldman's Sigma X. As a reminder, non-open ATS venues like dark pools, represent what the big money is trading when not masked with the churn volume of HFT darlings that provide easy liquidity rebates, and thus massive volume (but absolutely no liquidity). As we reported in the past two days, Intesa, Unicredit and Banca Monte dei Pasci have been consistently among the top traded names, and continue to be so for the third day in a row. Today it may be time to add Enel SpA. Also, Italian CDS in the 175 bps range are likely very cheap now that the law of communicating insolvent vessels means the bond vigilantes will finally shift their attention to an increasingly troubled Italy.

Courtesy of recent disclosures, the common man (as in anyone who does not pay millions in kickbacks, er, soft dollar fees to GS) can now observe what is being traded on Goldman's Dark Pool, better known as Sigma X. Why is this important? Because as Themis Trading presented last week, only 30% of all trading occurs on open exchange venues, meaning the bulk of actual shares change ownership behind the scenes, in places such as Sigma X, Chi X, and the dark pools of Credit Suisse, Citi, and various other banks, not to mention numerous other secondary ATS, where very little if any of the daily trading detail is released for general observation. This means that while HFT algos drive up the volume of numerous top 10 stocks merely for the sake of collecting rebates, the real action is in the most actively traded dark pool names, where the big boys are actively trading risk, where HFTs are non-existent, and the companies that represent the top 5 is what investors, speculators, and vacuum tubes should be focusing on. Not surprisingly, today's most active names are Banca Monte dei Paschi di Siena, Unicredit and Intesa Sanpaolo. Translation: someone is actively positioning for serious action in Italy shortly.

"Moody's Investors Service has today placed Italy's Aa2 local and foreign currency government bond ratings on review for possible downgrade, while affirming its short-term ratings at Prime-1. The main drivers that prompted the rating review are: (1) Economic growth challenges due to macroeconomic structural weaknesses and a likely rise in interest rates over time; (2) Implementation risks surrounding the fiscal consolidation plans that are required to reduce Italy's stock of debt and keep it at affordable levels; and (3) Risks posed by changing funding conditions for European sovereigns with high levels of debt." EURUSD slides on the news, which also pushes stocks far lower, courtesy of 100% correlation.

Following electoral upheavals in Portugal, Germany and Finland, it is time to add Italy to the list, after Silvio Berlusconi's center-right coalition appears to have lost the critical election in Italy's financial capital, Milan, which also happens to be the center of the Bunga Bunga man's business and media empire. And while the mayoral election is merely symbolic for now, its outcome has substantial consequences for Italian governance (and thus stability): "With most votes already counted, leftist Giuliano
Pisapia was set to capture Milan city hall with some 55 percent of the
vote against around 46 percent for outgoing center-right mayor Letizia
Moratti. The local elections were seen as a referendum on the billionaire prime minister. "This is the first defeat for Berlusconi's center-right coalition since they came back to power, and it sends a clear signal of voters' disillusionment," said Maurizio Pessato of pollsters SWG. "These results make early elections more likely, possibly next year, and I don't see any chance of meaningful economic reforms being implemented by a lame duck government." As is by now known, while Spain has recently reentered the bond vigilante's scope after its bonds have continued to traded near record highs, Italy has so far been spared. That will change soon: "Italy is the only euro zone economy in which, taking account of inflation, citizens are poorer on average than they were 10 years ago. Berlusconi's government last month cut its growth forecast for this year to 1.1 percent from 1.3 percent and cut next year's outlook to 1.3 percent from 2.0 percent. S&P's lowered its credit outlook on Italy this month due to its weak growth and failure to adopt reforms, although worries of an immediate impact on the markets eased after the Treasury sold long-term bonds near the top of its target range Monday." Will this be the catalyst that is seen as "change" to the status quo by enough bond holders that Italy becomes that last peripheral European domino to fall?