The Day After... Italy.

[Beet]

Well that (1 day rally) was fun while it lasted. Now back to reality...

"Italy paid the most since joining the single currency to sell new 10-year debt on Friday in the first euro zone bond auction after European leaders agreed new steps to tackle the debt crisis.
...
The auction yield on Italy's March 2022 BTP bond rose to 6.06 percent from 5.86 percent a month ago.
...
The yield on a three-year BTP maturing in July 2014 rose to 4.93 percent, at its highest since November 2000, compared to 4.68 precent at an end-September sale."

Link

As I have said before... either Germany will sign off on unlimited monetization or all the countries under pressure will default (and I consider any kind of monetary separation between Germany and the subject country a default). There is no other way. The movement of the markets are steady, swift and inexorable.

[Wonkish1]

Well that (1 day rally) was fun while it lasted. Now back to reality...

"Italy paid the most since joining the single currency to sell new 10-year debt on Friday in the first euro zone bond auction after European leaders agreed new steps to tackle the debt crisis.
...
The auction yield on Italy's March 2022 BTP bond rose to 6.06 percent from 5.86 percent a month ago.
...
The yield on a three-year BTP maturing in July 2014 rose to 4.93 percent, at its highest since November 2000, compared to 4.68 precent at an end-September sale."

Link

As I have said before... either Germany will sign off on unlimited monetization or all the countries under pressure will default (and I consider any kind of monetary separation between Germany and the subject country a default). There is no other way. The movement of the markets are steady, swift and inexorable.

Agreed. By the way, Beet what do you do for a living?

[Beet]

I work in computers... there are a couple others here in these boards who work in economics and finance who know more than me but they are pretty taciturn.

[Wonkish1]

I work in computers... there are a couple others here in these boards who work in economics and finance who know more than me but they are pretty taciturn.

I see. I'm actually pretty sure that ag is an econ professor if I'm not mistaken.

What sparked the interest in finance/econ to a level that you are actually making posts about changes in sovereign credit default swaps?

[Beet]

I have been interested in this for as long as I have been interested in computers, if not longer. So I presume that you do work in the industry?

[Wonkish1]

I have been interested in this for as long as I have been interested in computers, if not longer. So I presume that you do work in the industry?

Yep!

[Gustaf]

Ag is an Economics professor. I'm getting my master's degree in economics this summer (hopefully). Phnk is getting some degree in economics, I think, but I forget which.

I'm really not very impressed by the EU "solution". My impression is that they're trying to pass the buck into some vague nothingness.

[Wonkish1]

Ag is an Economics professor. I'm getting my master's degree in economics this summer (hopefully). Phnk is getting some degree in economics, I think, but I forget which.

I'm really not very impressed by the EU "solution". My impression is that they're trying to pass the buck into some vague nothingness.

Its like they are trying to make their "solution" as vague and complicated as a structured finance product to confuse the markets just like they accused all of those "greedy bankers" of doing a couple years ago.

[Beet]

Well, there's an article in the latest edition of Foreign Affairs that lays out the theoretical goal.

[Gustaf]

Ag is an Economics professor. I'm getting my master's degree in economics this summer (hopefully). Phnk is getting some degree in economics, I think, but I forget which.

I'm really not very impressed by the EU "solution". My impression is that they're trying to pass the buck into some vague nothingness.

Its like they are trying to make their "solution" as vague and complicated as a structured finance product to confuse the markets just like they accused all of those "greedy bankers" of doing a couple years ago.

Yep, exactly. That's why I'm so wary of it.

[Wonkish1]

Ag is an Economics professor. I'm getting my master's degree in economics this summer (hopefully). Phnk is getting some degree in economics, I think, but I forget which.

I'm really not very impressed by the EU "solution". My impression is that they're trying to pass the buck into some vague nothingness.

Its like they are trying to make their "solution" as vague and complicated as a structured finance product to confuse the markets just like they accused all of those "greedy bankers" of doing a couple years ago.

Yep, exactly. That's why I'm so wary of it.

But even then for those of us that do read all of the terms as they come out, its piece of crap delaying mechanism anyway.

[Sam Spade]

Yep, this will work...

[Wonkish1]

Yep, this will work...

So I just followed along that whole diagram seeing if there is anything I or that sheet is missing and Wow that is a very concise way explain the whole package. I couldn't put all of that in 10 paragraphs and whoever drew that was able to cover at least money flow through the whole plan.

I will say that diagram doesn't cover the 2 legal changes that are occurring though as well. New issuance is now written in English Common Law because it is more friendly to the bondholder yet another thing that will create a spread between old and new issuance. And the other is the retroactive destruction of sovereign CDS contracts by making defaults "non credit events".

[Beet]

And the other is the retroactive destruction of sovereign CDS contracts by making defaults "non credit events".

Does this mean that CDS spreads will start to become an unreliable indicator of sovereign default risk? I've been looking mostly at yields anyway, but mostly because of what timely data I've been able to find on my own. I imagine this is a useful market because it would send signals more reliably than credit rating agencies.

[Gustaf]

And the other is the retroactive destruction of sovereign CDS contracts by making defaults "non credit events".

Does this mean that CDS spreads will start to become an unreliable indicator of sovereign default risk? I've been looking mostly at yields anyway, but mostly because of what timely data I've been able to find on my own. I imagine this is a useful market because it would send signals more reliably than credit rating agencies.

Are they really doing the credit event thing? I read that there was discussion on it, but if they go through with that they essentially kill that market (at least for government debt) because they're essentially saying that they will never let a state fail in a way that will allow the insurance to work.

It's scary how most eurozone leaders display a total ignorance of how markets work. They really seem to not get it.

[Sibboleth]

It's scary how most eurozone leaders display a total ignorance of how markets work. They really seem to not get it.

I think it's quite understandable that they don't. But their senior civil servants (or at least some of them) and some of their advisors, well, maybe they should know better.

[Gustaf]

It's scary how most eurozone leaders display a total ignorance of how markets work. They really seem to not get it.

I think it's quite understandable that they don't. But their senior civil servants (or at least some of them) and some of their advisors, well, maybe they should know better.

Oh, right. I get that they might not have been educated on it originally, but once you reach the position of head of government you should have learnt a bit, imo. And even if you haven't, like you say, their advisors should be able to give them briefs.

I mean, it's one thing when Mugabe prohibited inflation but prohibiting credit ratings, which has been suggested by leading European politicians is at least as stupid (in a sense, probably even more so).

[Wonkish1]

And the other is the retroactive destruction of sovereign CDS contracts by making defaults "non credit events".

Does this mean that CDS spreads will start to become an unreliable indicator of sovereign default risk? I've been looking mostly at yields anyway, but mostly because of what timely data I've been able to find on my own. I imagine this is a useful market because it would send signals more reliably than credit rating agencies.

It appears to be the case. CDS spreads are now more unreliable because they now have to carry the intrinsic risk of the likelihood of a credit event not being called a credit event triggering the CDS contracts.

People are switching back to good old yields as their indicator of a choice now.

[Wonkish1]

And the other is the retroactive destruction of sovereign CDS contracts by making defaults "non credit events".

Does this mean that CDS spreads will start to become an unreliable indicator of sovereign default risk? I've been looking mostly at yields anyway, but mostly because of what timely data I've been able to find on my own. I imagine this is a useful market because it would send signals more reliably than credit rating agencies.

Are they really doing the credit event thing? I read that there was discussion on it, but if they go through with that they essentially kill that market (at least for government debt) because they're essentially saying that they will never let a state fail in a way that will allow the insurance to work.

It's scary how most eurozone leaders display a total ignorance of how markets work. They really seem to not get it.

Yep they already have. They already ruled on it.

[Beet]

Italian yields hit another record high today

“The European rescue plan is falling apart even faster than I expected,” Mr. Krugman said on his blog. “[If] the debt must be rolled over at [above] 6 per cent, given the size of Italy’s debt, that vastly increases the primary (non-interest) budget surplus Italy needs to stabilize its position. And that difference is quite plausibly the difference between paying its debts and defaulting. So we’re deep into self-fulfilling pessimism territory here. Either the ECB moves in with big purchases, or the euro is crostini.”

Germany: The cards are in the air. Make your choice. The idea that Spain and Italy will go down the Greek path and succeed where Greece has failed is sheer lunacy. Paul Krugman and the Anglo economists are right on this one. ECB must either step up or all of Europe must prepare for a cascade of sovereign defaults now.

[Beet]

Italian expenses are about 600 billion euros and about 200 billion euros in debt are coming due in the next year. Under the worst case scenario, Italy is shut out of the markets, it will have to pull off a fiscal adjustment of 200 billion euros in the next year, on top of what will surely be surging unemployment and collapsing banks that will need recapitalization. That means a 1/3 cut in total spending in the context of a collapse of the economy, all in one year. Even if Italy were not completely shut out of the markets, it would be foolish to issue debt at prohibitive yields, for this will only result in an ever-increasing spiral.

Politically, the best move for the next government is not to enact specific cuts upfront but to enact 'automatic' adjustments that legally mandate the government will reach its debt targets. The problem in Greece is that each new round of cuts needed a new vote. Instead, they should just pass one will that will contain with it automatic cuts whenever targets are not met. This way, the cuts are insulated from the political system. I think the focus should be on spending cuts, not tax increases, because taxes all face collection risk, whereas spending cuts only involve turning off the spigot. The government must assume strikes and massive civil disobedience and be prepared to crush them.

Alternatively, the new government can come into office on Day 1 and say 'f--k you' to Brussels, restore the lira. If they have the guts to do this (which I doubt) they will initially face near revolution, but if they can survive for 6-12 mo. eventually become the Kirchners of Italy and still be enjoying glory after 10 years.

[TheDeadFlagBlues]

Italian expenses are about 600 billion euros and about 200 billion euros in debt are coming due in the next year. Under the worst case scenario, Italy is shut out of the markets, it will have to pull off a fiscal adjustment of 200 billion euros in the next year, on top of what will surely be surging unemployment and collapsing banks that will need recapitalization. That means a 1/3 cut in total spending in the context of a collapse of the economy, all in one year. Even if Italy were not completely shut out of the markets, it would be foolish to issue debt at prohibitive yields, for this will only result in an ever-increasing spiral.

Politically, the best move for the next government is not to enact specific cuts upfront but to enact 'automatic' adjustments that legally mandate the government will reach its debt targets. The problem in Greece is that each new round of cuts needed a new vote. Instead, they should just pass one will that will contain with it automatic cuts whenever targets are not met. This way, the cuts are insulated from the political system. I think the focus should be on spending cuts, not tax increases, because taxes all face collection risk, whereas spending cuts only involve turning off the spigot. The government must assume strikes and massive civil disobedience and be prepared to crush them.

Alternatively, the new government can come into office on Day 1 and say 'f--k you' to Brussels, restore the lira. If they have the guts to do this (which I doubt) they will initially face near revolution, but if they can survive for 6-12 mo. eventually become the Kirchners of Italy and still be enjoying glory after 10 years.

Fascism in the name of our glorious GDP Gods, wonderful!

[Beet]

Even as I was typing that, I knew that a 200 billion euro adjustment in 1 year simply isn't impossible. If Italy is effectively shut out of the markets there is absolutely no way it will avoid some sort of default.

[Wonkish1]

Just look at the Italian BTP numbers today! Unbelievable. The only thing that stemmed it for a little bit was the false rumor that Berlusconi was going to resign today.

Italy is screwed!!!!!

[Torie]

How can this euro thing work without a common fiscal policy?  And if all of this lending by banks to the sickie countries had not occurred, would it be a problem to just let them default?  Someone needs to educate me on this. I feel at sea.