CAC Is A Four-Letter Word: Italian Debt - A Financial Disaster Waiting To Happen


The new Italian government will increase public spending and public debt. It promised to reduce taxes, introduce basic security and reform pensions. Italy’s Northern League’s leader Mateo Salvini surged in the polls and the party is now the strongest in Italy.

A couple of years ago it was inconceivable that this regional group could become Italy’s leading political party. We should expect more to come. As the saying goes, it just could not happen till it happened. The financial establishments in North European countries like Germany and the Netherlands assume that the politicians of M5S and Lega Nord will follow the Greek script and will backtrack on their promises.

But Mateo Salvini and Prime Minister Giuseppe Conte know that if they do not live up to the expectation of the voters, they will be voted out of office. They are also aware of it that the Italian voter has still another alternative called “CasaPound”, a much more radical, if for the time being insignificant, social and anti-migration movement.

The planned reforms could burden the state budget with an additional 125 billion euros per year. Can the Italian government afford such a thing?

The question is rhetorical when you look at Italy’s growing debt mountain.

It amounts to €2300 billion, of which 1900 billion are government bonds. What should worry investors, however, is the structure of this debt. Ten years ago, when the last financial crisis broke out, 51% of these government bonds were hold by foreign investors. When the climate for investment in a country deteriorates, they sell these bonds immediately. When in 2011 the Berlusconi government threatened to withdraw from the eurozone budget rules because of the huge budget deficit, German and French banks sold Italian government bonds BTP (Buoni del Tesoro Poliennali) worth a total of €150 billion. In the following years, foreigners bought Italian debt instruments again for around €100 billion, but their share is now very low at 36%.

Most of the packages currently are owned by Italian banks and insurance companies, and their financial condition is already weak: last year the Italian government rescued, Banca Monte dei Paschi di Siena at the expense of the Italian tax payer, against the wish of the Frankfurt banking establishment. The Italian financial situation became more sensitive when there was turbulence around the new Italian government in May this year: the Italian BTPs (Buoni del Tesoro Poliennali Italian Government Bonds) lost 8% in value. If prices remain under pressure, Italian banks will have to sell off these bonds at a lower price and with huge losses to ensure that their solvency will not be further endangered. To comply with the European debt-to-capital ratios, they have to raise new capital or increase interest rates and grant fewer loans.

Also the ECB is responsible for the rising yield on Italian government bonds. When in May the Five-Star Movement and the Lega merged to form a government coalition, the ECB suddenly reduced purchases of Italy’s national debt, which exacerbated speculation against the BTPs. In this way Brussels wanted to punish the Eurosceptic “populists”. This was confirmed by Günther Oettinger himself, who always considered Italy ungovernable. In an interview for Deutsche Welle, he called the turmoil on the financial market “a signal to Italian voters not to vote for populists from left and right”. In plain language – if they had elected corrupt democrats who were not breaking ranks with Brussels, the Italian debt could have continued to be financed by the ECB.

The introduction of a parallel (or fiscal as the Italian like to call it) currency is one of the promises that the new Italian government has given to make “Italy Great Again”. The central bankers from Northern Europe we talked to are appalled by the idea and are convinced that Italians will not even consider such a plan. Its author – Paolo Savona – the current Minister for Europe – already claimed in 2015 that the denomination of euro national debt into new fiscal currency “nova-lira” national debt was neutral for domestic investors.

This claim is not true, however, because since January 2013 all government bonds in the euro zone have been issued with a so-called collective action clause. CAC means that the issuing state may not change the bond terms on its own: any change requires the consent of the majority of creditors. The share of BTPs with CAC compared to that without CAC has been rising continuously for years. In 2017 it was 48%, this year it will already reach 60%, so that Savona’s plan is hardly feasible.

Italy’s national bankruptcy is imminent and the next financial crisis can soon be triggered off by problems of the Italian banks, which the ECB and Brussels’ technocrats are unwilling to rescue, all the more so since Lega and Movimiento 5 Stelle are in power.


vato poco any_mouse Tue, 07/03/2018 - 04:01 Permalink

aaahhh, fuck me running

Zh breathlessly alerts us that italian debt ain't really the sturdiest of investments. which has been the case since ... what? .... 1954? 1946? 1935? 1922? 1915? 

what next? stunning expose of greek & argy bad financial practices?

In reply to by any_mouse

Heros vato poco Tue, 07/03/2018 - 04:18 Permalink

To paraphrase Poncho Villa:  "CAC?  We don't need no stinkin' CAC"

Just like in our personal lives where we see how certain people can act with impunity before the law, so we see nations do the same.  Israel can get away with genocide, the US can simply tear up any agreement it no longer finds convenient.

If the ECB really starts playing hardball and the interest payments doubles or triples on Italy's sovereign debt, then at some point it will simply stop paying interest.   Argentina has more than once.  Watching the Eurocucks in Brussels react will be quite entertaining.

In reply to by vato poco

Heros any_mouse Tue, 07/03/2018 - 04:06 Permalink

" “a signal to Italian voters not to vote for populists from left and right”. In plain language – if they had elected corrupt democrats who were not breaking ranks with Brussels, the Italian debt could have continued to be financed by the ECB."

Once again, the true purpose of the ECB is exposed:  The chains that bind the EU together.

IIRC, Amschel Rothschild wrote:  Give me control of a nations money supply, and I care not who sits upon the throne.

In reply to by any_mouse

Peter Pan Retired Guy Tue, 07/03/2018 - 04:20 Permalink

Nothing happened in Greece because they managed to convert the exposure of French and German banks to the Greek banking system to being the exposure of the Greek nation. The French and German banks were paid out.

And the way they managed to stitch up the deal between Greece and Germany and France was a combination of threats and promises.

Same shit....different deodorant.

In reply to by Retired Guy

MrSteve To Hell In A H… Tue, 07/03/2018 - 08:23 Permalink

Does Italy need those banks? Euro script currency? Brussels bosses? No. Being the world’s 7th largest economy means somebody else has a problem. Italy needs to avoid the depression that austerity brought to Greece, if possible. Following IMF rules, depression is assured. Revaluing an Italian currency is the best way forward, with a tough lesson for unsecured creditors.

In reply to by To Hell In A H…

hooligan2009 Tue, 07/03/2018 - 07:51 Permalink

italy has a choice.

remain debt slaves servicing the morally bankrupt european elites


take bankruptcy now and restructure, either within the EU or without it.

why put off the inevitable? "better to die on your feet than live on your knees."

StrikerMax Tue, 07/03/2018 - 11:00 Permalink

Very Mistaken and Wrong assessment on the text:

"... Most of the packages currently are owned by Italian banks and insurance companies, and their financial condition is already weak: ..."

Well looking at the chart Currently :

18% = held by ECB

35% = held by Foreign

18+35 = 53 % ..that is the Majority of Debt is actually Held by Foreigners!

Also the  28% held by Other National creditors must be very well explained since the problem is some if not most of it are actually Local financial Institutions Owned by Foreign Banks and other companies ...

For example for Legal reasons Goldman Sachs can have financial instruments in Italy that are actually counted on that "other National" when in fact it is Debt owned by GS the same goes for Deutsche bank/French banks and others ...

so the most of the debt is not held by Italians! On the contrary it is owned by foreigners!

Paracelsus Tue, 07/03/2018 - 11:29 Permalink

Wanna bet that the pile of stinking,toxic derivatives that Deutsche Bank has with JP Morgan ($70 Trillion?) is a lot to do with possibility of Italy defaulting and restructuring? Didn't we already see this movie once with Greece? Deja Vu, anyone?

Also, try this on. Italian Banks load up with free cash from the Fed in 2001,and make huge loans to finance the construction bubble in Spain for ten years.Now those loans go sour but the Italian Banks are in denial, and don't want to write them down. The reason is that to do so would make the largest Italian Banks effectively insolvent. Remember, everything went fine with the carry trade on Wall Street during the Subprime fiasco until the short-term money liquidity dried up. I will say it for the hundredth time, someone gets to tell the German pensioner that his money loaned to Greece and Italy is gone and not coming back.Once the mountain of derivatives is triggered there is not enough cash on the planet to solve this. Just look at DB's share price these days. 

Paracelsus Tue, 07/03/2018 - 11:50 Permalink

From the article, the situation of Italy appears to mirror Japan's where the gov't debt and the pension funds are held internally.However, Japan may print their own currency while the Italians do not have the option of inflating (Euro) as they do not print the Lira anymore.

Yep. Classic debt trap. They are stuck. Spain must pay them back the bad loans but cannot or will not. Italy needs this money to pay back the Europeans. It is a big problem, and the Italian solution is to have fresh elections! Voting solves everything. Some years back the Argies were trying to get out from under and restructure,BUT,the lawyers had made the deal worded such that it would play out in a New York court room. These idiots were holding a country to ransom so that they could be paid out 100%. This was a miniscule amount of the overall debt effectively blocking the success of a country's bankruptcy, doing what lawyers do best,stalling and running out the clock. Funny thing is, with Iceland the banker's got their bluff called: "Surely you wouldn't default". "Don't call me Shirley!".    

Paracelsus Tue, 07/03/2018 - 12:10 Permalink

The Greek economy must grow if they are to be able to pay back the Germans. They tried austerity, cuts to benefits. This is like searching for coins in the sofa cushions. The Italians are next up for the Greek treatment and they know it. The Italians have seen the problem clearly: by surrendering their ability to inflate their own currency, they are stuck. Without growth and foreign investment in Greece, how are they to pay back the debt? Without growth and investment in Spain and Italy, how are they supposed to pay back the European Banks? I am guessing this whole pile of toxic trash has been hedged with derivatives between Deutsche Bank and J P Morgan using that classic time tested theory, "Too big to fail".

Paracelsus Tue, 07/03/2018 - 12:13 Permalink

 When the debt bomb goes off it will make a huge bang. Bankers: print money, fuel a bubble, get out before the mugs can react, start a war to keep everyone distracted. Rinse. Wash. Repeat. Funny all this chatter about NATO these days...... 

Herdee Tue, 07/03/2018 - 15:49 Permalink

Maybe Italy will become the new standard for a "Bail-In" and Cyprus will take second place? You can thank your politicians throughout the G20. You know who they serve and it's not you.