Debt Crisis Dead-Ahead: Italy's Results Are Truly Forza Italia!

Authored by Tom Luongo,

Europe is headed for a breakup.  But, after a year of watching the EU establishment work the polls just enough to maintain the status quo in the Netherlands, France and Germany I wasn’t expecting much from yesterday’s Italian elections.

But with turnout over 73% we got just that.  Voters were clearly motivated to change the course Italy is on.  Now, we knew that Silvio Berlusconi’s center-right coalition would do well alongside upstart Five Star Movement.

The question was always going to be, however, how well would they do?

It looks like it was much better than the polls wanted us to believe.   Last week I told you the markets were getting nervous about this election.  This weekend the news was all about how subdued the reaction was to the polling.

As if a major technical breakout to the upside on Italian bond yields in the face of furious ECB buying wasn’t a strong enough market response?

But, that’s doesn’t fit the plan to gaslight voters and traders to worry about the potential outcome here.

The League of 5-Star Gentlemen

It looks like Five Star Movement will take more than 30% of the final tally, which is a couple of points above where polling had it tracking when the blackout went into effect two weeks ago.

The bigger result is that of The League (formerly The Northern League) who came off their secessionist mountain and ran hard on a platform of euroskepticism and anti-immigration.

The most important person in Italian politics right now is The League’s leader, Matteo “The EU can go F&%k itself” Salvini.

When the final votes are revealed, if The League out-polled Silvio “Establishment Stalking Horse” Berlusconi’s Forza Italia! then he has the hammer in coalition negotiations.

This is exactly the situation I was hoping for in this election. Because this paves the way for Salvini to pull out of the weak coalition with Berlusconi and form a stronger government with Five Star.

And at that point the price of Tums in Germany rises sharply on new demand.  Because the ‘agita’ over Italy’s untenable banking and debt situation will be enormous.

But, if you want to know what the real issue is just look at this map of Italian unemployment.

1% GDP growth is not something to cheer about when you have this kind of capital destruction for half of a country.   And with the euro above $1.20, just like Germany wants it, this is only making it harder for Italy to compete in world markets.

In other words, German strong-euro policy is creating the very election results now creating agita in Berlin.

Forza Populism!

Politicians are stupid.

They don’t know anything about currency, capital flow or substitution effects… except when it feathers their nests.  But, when a policy is inconvenient to them they invariably blame ‘the market’ which is another way of saying ‘blaming the people.’

When the people rise up and vote to end their clown show they cry “Fascism!” or “Populism!”

But this trend is in place all around Europe and it won’t end here.  Next month Hungary goes to the polls.  It’s leader Viktor Orban and his Fidesz party have the opportunity to grab a super-majority with coalition members and begin altering the Hungarian constitution to the desires of Hungarians, not the EU.

Italy just gave Hungary a big boost of adrenaline to do just that.  It also gave Poland an assist in resisting Angela Merkel’s crusade to crush Polish sovereignty for the second time by Germany in under a century.

There comes a point where lying to your people doesn’t work anymore.  They can see with their own eyes what’s happening and no amount of gaslighting via polls, economic statistics or Alinsky-style shame tactics works anymore.

That’s what’s happening in Italy.  And that’s the beginning of the end of the European Project.

Debt Crisis!  Dead Ahead!

Right now the market has been lulled into a false sense of security by the ECB’s manipulation of bond yields via its asset purchasing program, i.e. QE.  Five year Italian Credit Default Swap spreads are at a 6-month low thanks to a lack of concern about these election results.

So far, there has been no knee-jerk reaction but that can and will change if Salvini and Five Star head Luigi Di Maio put their heads together and form a workable coalition.

Because Italy’s banking system is more functionally insolvent than everyone else’s (by orders of magnitude) there will be a push by the market to resolve this situation.

For months I’ve been warning you that that all we needed was a trigger to end this counter-trend rally in the euro and firm up the U.S. dollar.

We’ve seen the rush into the euro while bond yields began rising a few months ago.  This is an investor class moving to cash pre-positioning for a chaotic market.  We’ll see a bit more of this while these results are digested and there is still hope for a Grand Coalition deal between Berlusconi’s center-right coalition and the failing Democrats.

But, more likely is what I just laid out above.  So, the next step will be the wholesale pulling out of assets from Europe once Salvini rejects a deal from Berlusconi and he and Di Maio form a government.

And once that occurs, CDS rates will rise, bond yields (already under pressure from a tightening Fed) will rise as well and the next wave of the cycle can begin.

Salvini knows the euro is the main source of Italy’s pain.  He’s said as much.  Now here’s the opportunity to heal Italy as a country and bring the North, where The League is strong, and the South, where Five Star is strong, together for an Italy which stands up to the depredations of a voracious EU bureaucracy.

As I’ve pointed out multiple times, the German people have no desire to bail out Italy.  They wouldn’t bail out Greece, a much smaller problem.  They just voted for no bail-outs and are marching in the streets against more strain on their social fabric via Merkel’s immigration policy.

So, the only path forward in Italy’s best interest is Salvini and Di Maio coming together and selling a showdown with Germany over the euro and debt relief.  Once they move forward with reforms both Brussels and the IMF will not back the true face of the EU will be shown and I expect an already angry Italy will shift very quickly towards Italeave just like what happened in the U.K. with Brexit.

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EuroPox Tue, 03/06/2018 - 03:36 Permalink

The Euro cannot survive... will Italy pull the plug or will the Eurocrats threaten Silvani's life (just like they did to Tsipras - which was why he did not follow up on his pre-election promises and why Varoufakis had to go)?

Haus-Targaryen knarkworst Tue, 03/06/2018 - 03:58 Permalink

While I agree with the author's analysis -- I disagree with his conclusion. 

As with Tsipras and the Greeks ca. H1 2015, and Juncker's "There can be no democratic decision against the European Treaties" ... the path forward is very clear. 

Let's say for a second that M5S and LN form a government with the goal of nuking the euro from deep space -- like the Greeks there will be scrambling, perhaps the ECB will use bank liquidity as a weapon to bring the population to its knees -- perhaps there will even be another referendum in Italy. 

At the end of the day, something somehow will be communicated to the Italian "head of state" behind closed doors and he will magically change his position on the EU and the euro, exactly like Tsipras did. 

I imagine there is a conversation where each "head of state" learns they aren't actually a head of state, and are more or less just a caretaker. At this point said "head of state" will throw his own people under the bus and the EU has successfully extinguished a potential fire for another few years until a more "friendly" government can get "elected". 

This keeps working until one of two things happen:

a) Some external shock wipes the euro (and the EU by extension) off the planet which is beyond the control of politicians here; or

b) Some systemically relevant EU nation experiences a "Red October" kind of revolution where politicians are handing from highway overpasses and the "wealthy" are fleeing for their lives. 

Sorry to bust your bubble, but there is no "democratic decision against the European Treaties" ... Juncker is right.  I think what he meant to say was "While there can be decisions agains the European Treaties, they will be simply ignored or discarded until the will of the people can no longer be ignored and end up hanging their own 'governments'." 

In reply to by knarkworst

Teja purplewarrior Tue, 03/06/2018 - 09:38 Permalink

Italians are actually on average richer than Germans. Also, Italian debts hold to a large part by Italians themselves. Thus I would not expect a debt crisis. That also explains why M5S and Berlusconi moved quietly away from any Euro exit. All their party members € holdings in Italian banks and Italian bonds would loose half their value, at least. Nah, they will keep their feet still.

What has become obvious, though, is the political split between south and north. The Lega formerly called Lega Nord rules the north, the 5 Stars the south and the Adriatic coastline. The region around Rome contested between the two.

It is an illusion that the Lega and M5S could be allies, though. Different mindset and cultures.

In reply to by purplewarrior

doctor10 Haus-Targaryen Tue, 03/06/2018 - 05:41 Permalink

The Euro is a worthless currency. Those suborned to it will never make enough with it and from it to pay off any debt with it whatsoever.

Any Italian Lira, or for that matter, Greek Drachma, has more potential to serve the bankers than the Euro.  Bankers are usually smarter than this-but they got suckered by the NWO delusion and the illusions of productivity of a forced migrant growth population.

In reply to by Haus-Targaryen

Der Libertäre Haus-Targaryen Tue, 03/06/2018 - 05:45 Permalink

I waited for this election like a 4year old for Christmas. I expect a first step to the exitdoor by saying "we need the Lira back as a 2nd currency to be able to devalue". This will quickly be copied by others until their sytems run in national currencies again and the Euro will be only an appendix for nothing but debt papers.

The last big idiot with a whole bunch of Euro debt papers and Euros - all totally worthless by then - will be Merkellandia. The Germans will pay the debt of all as they have a collective historic guilt anyway. And I do not expect a thank you but a "hate you" from the world (Poland is first these days to install hatred against Germany again).

We have had 8 years of Potemkin now.

How did you go bankrupt? First slowly then suddenly!

First 2nd currencies everywhere and when Germany is bankrupt (remember "sick man of Europe") all others will leave quickly.

If nations do not free themselves from the Euro system, they will break into pieces. The Germans say: The shirt is closer than the jacket. Junker is a nobody. Merkel is "the man" (of Soros) - the next guilt cycle for Germany installed.

If Germans (persons not country) want to survive, they must get out before they are closed up in. I argued since 2010 "What, if we wake up in East Germany one day?" I was laughed at.

I honestly wonder, what all has happened - what MADNESS came over us - without that anything reactive happened.

Time seems to be up.

In reply to by Haus-Targaryen

Jo A-S EuroPox Tue, 03/06/2018 - 04:13 Permalink

Spot on re Tsipras.  He bottled it.  He had the vote to leave he Euro.  A large referendum vote to leave.  If Greece had declared bankruptcy, they'd be on the road to recovery.  At the moment, Greece's tax income balances out outgoings. BUT, she can NEVER repay the debt owed.  And the EU/Germany knows it........  Hence, Greece is, in effect, continuously grovelling to them.......

In reply to by EuroPox

CRM114 Jo A-S Tue, 03/06/2018 - 14:03 Permalink

If Greece had declared bankruptcy, they'd be on the road to their next bankruptcy.

Greece has been bankrupt 5 times. Greece has spent half its existence as a modern nation in bankruptcy. They are the World experts at it. 

Have you ever been to Greece?

I have. I love the country and the people, but I wouldn't invest a single cent there.

First thing Monday morning (about 10:30) they are all hard at it down at the cafe, talking about the week's work, which they usually start on about Wednesday, after lunch.

In reply to by Jo A-S

sarz zenon Wed, 03/07/2018 - 06:26 Permalink

It's neither knowledge nor an educated guess. He's lying. Tsipras is a crypto-Jew who was put in place by Soros.

Part of the anointment was done with headlines like "Charismatic Greek leader appears from nowhere". His job was to make hash of Greek sovereignty and its Christian identity for the benefit of the mega-Jews and Israel and he's been a huge success at that. Reneging on the promise of financial sovereignty is only the most obvious. Rothschild's Economist drooled with delight at telling us of the rupture Tsipras has wrought in the intertwining of religion and state dating from the earliest years of Greek independence. And Mondoweiss pointed out that Greece’s Syriza, behind the screen of constant whining about how bad Syriza was for Israel, made a military deal with Israel that only US has made. 

In reply to by zenon

gregga777 EuroPox Tue, 03/06/2018 - 06:56 Permalink

1) Owe a bank $100,000 and it's your problem.

2) Owe a bank $100 million and it's the bank's problem.

Italy owes the Deutsche Fourth Reich somewhere around €800 billion in TARGET2 funds. That definitely fits the second of the above situations. Italy's TARGET2 debt is very definitely a big problem for Deutschland. 


In reply to by EuroPox

DaiRR buzzsaw99 Tue, 03/06/2018 - 05:13 Permalink

The Italians love a party.  Heck, back in the '60s an Italian family down the road had their first member ever graduate from high school, and their party went on for FIVE DAYS. 

So it would be awesome if Italy told the EU to shove it and declared a DEBT JUBILEE.  Can you imagine how the Italians would party down with that move?  I want to be there.

Greece should grow some balls and do the same thing at the same time.  Italy-Greece, kind of a special Club Med bond there.  Then they should both drive their bad immigrant hordes to seaports, march them onto tramp steamers, which will then deposit them on the shores they originally launched to Italy from, from Turkey to Morocco.  Time to start liberating W. Europe countries.

Bring back the Lira !  Tell the EU and the UN to shove it.  Tell the Argentinian papa to shove it too.  Take your country back now or lose it forever.

In reply to by buzzsaw99

coaltar Tue, 03/06/2018 - 04:04 Permalink

Seems rather manufactured dunno why you'd conclude otherwise, but yeah sure 2018 is just going to be another big old coincidence I guess, eh?

Kaeako Tue, 03/06/2018 - 04:06 Permalink

"Salvini to pull out of the weak coalition with Berlusconi and form a stronger government with Five Star."

Not going to happen. 5 Star is closer to Syriza, while The League drifts towards the AfD types. Most likely result of the election is no result, they'll get nothing done. As is usual in Italy.

TrumanShow Tue, 03/06/2018 - 04:26 Permalink

It all looks very promising...until it isn't. Every European election has followed the same path. The voters swinging to the fringe parties who promise a break from the EU but somehow, inexplicably they all just fall short. A coalition that manages to keep the incumbents hanging on by a thread is pulled out of the ashes and the party continues. It will be the same here. Even if they have to go in with a 'radical' party they will all of a sudden not be so radical and will all start wearing Armani suits and Rolexes.

Fremover Tue, 03/06/2018 - 04:30 Permalink

Nothing will ever change, if the Italians have a say. A more disorganized population you can hardly find. May be except for the Irish or the Scots, or the French or the Spaniards, og the Greek, or...

Even if one of the parties would gain 75 % majority, they would still have to cope with a minority government, since they just can't agree on anything. Even 100 % majority with only one party in charge, nothing would change. They don't want change.

It just them being what they know best, Italian.

It will only change when it is forced upon them from outside. So, just relax. Nothing will happen. Nothing. 

Oh, the Russians... Or the Chinese... Or the Americans... Or Brussels...

overmedicatedu… Tue, 03/06/2018 - 07:26 Permalink

a few years ago we were all cheering for Greece ..they caved..with bought off pols

Italy has run the corruption game for millennia expect payoffs from EU very shortly

with ZHers getting all steamed up about breaking the Banksters grip on Europe. it will be another big let down. sadly 

the_river_fish Tue, 03/06/2018 - 09:07 Permalink

The divergence of interest rates, bond yields, inflation, currency strength, budget deficit and total debt of countries around the world has never been bigger.


With a 0% interest rate for the Eurozone, Germany and Netherlands have returned to a budget surplus since 2016. The budget deficit of Italy, Spain and Portugal is reducing.And all 3 have lower yields on 10 year issuances than the US. As long as a Central Bank backs such easy money - no one is really going to leave the club.

High (or hyper) inflation or long term zero (or negative) interest rates – how might the world pay its debt?







Herdee Tue, 03/06/2018 - 10:00 Permalink

The Italians saw what the EU and the Germans did to Greece. The Italians will say to them " You just keep your F'n banks, they're all yours baby"