Wednesday 9 November 2011

Silvio goes, Italy bond yields hits 7%, students riot

I would have lost my bet over just a few hours difference!

Silvio Berlusconi has finally given up the ghost in Italy and still the markets are pushing up Italian debt costs. 7% is well beyond the means of the Government to fund long-term. In the UK you would be currently looking at another £40 billion a year in debt servicing costs - imagine the pain of those cuts.

However, I am really looking forward to the riot today - something fun to watch out of the window!


Anonymous said...

8% is the long term average interest rate...

Everyone better get used to living within their own means.


CityUnslicker said...

Umm...doubt UK rates are going there. The rate spike like this will be followed by big deflation if the economy collapses.

Old BE said...

What is the Italian deficit like? Also, lots of people quoting the 360bn Euro number for Italy in 2012. What is the equivalent UK number?

I can't work out what the effect of this will be on me. Will it be another recession or will the government overreact and cause hyperinflation?

I am back to wondering whether I should be getting my savings out and rinsing them while they are still worth something!

Nick Drew said...

'Humour' ?!

glad we can all still laugh about it!

hovis said...

I'd agree CU - deflation if it al goes metaphorically south.

O/T but I wonder what Andrew Sentance's prescription would be ? to raise interest rates perchance?

Anonymous said...

The problem with Italy is not the 7%, it is the fact that on a 10 year bond that means the Italian government would be claiming that whilst at the moment it can't afford to pay 1.6trillion Euros of debt, in 10 years time it will be able to pay back 3.2trillion Euros of debt.

That wouldn't be very credible at the best of times. So at 7% the Italian government is basically saying "here are our debts at rates which ensure we won't pay them back" and the markets are saying "no thanks". This leaves Italy unable to roll-over its debts, with the equivalent of about 20% of GDP to be rolled-over next year alone. Clearly it can't get that kind of money from taxation at short notice either.

So that leaves the ECB - which can't roll-over the debt for Italy because it isn't allowed to print money (it is buying Italian bonds but these have to be paid with by real money from banks depositing with the ECB as it isn't allowed to print money). Then you have the ESFS - which doesn't have the funds available at the moment and is relying on being able to leverage the funds by raising more Euro debt which it is struggling to do because its planning on taking on lots of bad euro-debt which hardly makes it the safest investment vehicle. Then you have the IMF which doesn't have much money and wasn't set-up to bail out the likes of Italy anyway.

So I don't see a way out of this for Italy now. It really is screwed. Nobody seems to be really engaging with the problem (no surprise since they haven't even sorted Greece out). Maybe they will struggle on with ESFS bailouts until the ESFS runs out of money, but then...

...we come to Spain. If Italy sucks up the funds in the ESFS then there will be nothing left for Spain. Spain risk of default is also going through the roof right now lookind at CDS on its debt. That will leave Spain with no chance of any kind of bailout with the European economy falling into a steep recession. That will take out Spain for sure. Ireland and Portugal will also likely to be forced to bring out the begging bowl again, but this time with no cash forthcoming.

The Eurozone is screwed. Totally, utterly screwed. Thank god we can print our own cash. Why the hell won't the ECB realise that is the only door open to them?????

Sean said...

easy anon, Germany got the euro because the German courts ruled that as long as the ecb mirrored the Bundesbank rules regarding inflation then the euro was constitutional.

To start printing money would therefore be illegal without a constitutional change in germany itself, and or it could leave?

CityUnslicker said...

Anon 3.22- that is a super comment, well done.

It is looking very, very bad. So we have to laugh ND - that or cry.

Anonymous said...

...or get thrown out? It is looking more and more like Germany is odd man out here. Italy, Spain and in a secondary effect France are all likely to go down with the sinking Euro ship unless the Germans agree to allow the ECB to print money.

Naturally this will make the Euro a very "Latin" affair with somewhat elastic monetary rules which in any case Germany and other "hard currency" countries would find very difficult to live with. Germany would desparately love to stay in the Euro to give it the level playing field to allow it to continue to gouge out its weaker European competition as it expands remorselessly its industrial base, but the penny is likely to drop with everyone else in the EU that this is exactly the problem - Germany is achieving (perhaps by accident rather than design) by economic means exactly what it could not do by war.

I really can't see that the "hardworking" Germans (as they perceive themselves) will want to pay (from the real German economy) to support the rest of an EU that simply can't keep up with it (and has thus seen the real economy in those countries thrown into turmoil). Thus Germany might find itself outnumbered by damaged EU nations desparate to save themselves from further damage that will cause real hardship (given that the situation in Spain, Italy and Greece is going to leave people literally begging on the streets for food when the social welfare funds run out of cash). Those damaged EU economies will be sure to want to inflate their debt problems away with freshly printed Euros and start from scratch.

Sebastian Weetabix said...

Of course the curious thing about German fiscal rectitude is that they themselves are the worst defaulters in history and if it hadn't been for the largesse of the victors after the end of the second world war there would have been no Wirtschaftswunder. They seem not to remember any of this.

Now, if I were Greek, I would be thinking of this and saying to myself..they stole all the gold in 1941, they never paid it back and they have never paid war reparations, and they murdered in cold blood tens of thousands of Greeks... now they subvert our politicians, stage a coup & force us into everlasting austerity leading to eternal penury.

Clearly the Euro is proving a fantastic tool for European unity. On the radio at lunchtime today I heard the triumvirate of Michael Heseltine, Neil Kinnock & Shirley Williams all opine that we should still aspire to join the Euro "when the time is right". Even at this late stage they want us shackled to a corpse in connubial un-bliss. What can you do with these arseholes? Hang 'em from lamp posts?

btw, the WV is stupendous: "focked"

Nick Drew said...

WV is without doubt the most remarkable algorithm google ever devised

Anonymous said...

I'm not sure that the German economic miracle hasn't got more to do with the US need to make it the shining light of capitalism in Europe during the 50s. The Americans pumped a lot of money into Germany in the two decades after WWII behind the scenes.

By the way, have you noticed that the Germans don't seem to like to meddle in the French market and the French don't seem to like to meddle in the German market? They are more than happy to play havoc with the markets of other countries. Seems like their partnership extends way beyond what we can see at the EU. Perhaps there are two games being played in Europe? The EU socialist total domination game and the Franco-German nationalist domination game? Maybe that's why us Brits can't really ever get a grip on the EU.