The Day After... Italy.
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  The Day After... Italy.
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Beet
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« Reply #50 on: November 08, 2011, 08:22:04 PM »

But what evidence is there that European governments would "borrow to the hilt" as you say, and then "blackmail the ECB"? You talk as if European governments were rabid animals without restraint or intellect. I give them more credit than that. Surely they would see that what you describe is a tragedy of the commons scenario and not do what you say.

They'd see the tragedy of commons, but you will have taken from them the only mechanism out there to prevent falling into it. That mechanism right now is the merciless ECB, that won't budge no matter what and the implicit threat that the "misbehaving" country will be treated like Greece is treated now. Take those away without providing other mechanisms (i.e., political and fiscal integration) and you create the situation in which any "responsible" government would, in fact, be grossly irresponsible to its own voters - it would be letting the others to suck them dry.

But Italy will be punished now even when it is not misbehaving. All of the reforms they need take time. They need to change the entire structure of their economy, if not their entire national culture. They'll need longer than the couple of weeks the bond markets will give them to do it, and because of their size, a Greece-style bailout seems out of the question (and poorly advised).

Also, what do you think of my proposal of 1:29 pm?
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opebo
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« Reply #51 on: November 09, 2011, 01:23:26 PM »
« Edited: November 09, 2011, 01:26:08 PM by opebo »

They need to change the entire structure of their economy, if not their entire national culture.

The rule of the neo-liberal world is that all pleasant cultures are to be destroyed and made Calvinist racks of misery.

But after all that is completely unnecessary:

The European Central Bank, the only effective bulwark against market attacks, wasted no time intervening to buy Italian bonds in large amounts.

"The ECB is buying aggressively," one trader said.
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Wonkish1
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« Reply #52 on: November 09, 2011, 02:12:09 PM »

Ouch!!! That margin hike certainly did a number on the BTPs and the rest of the world today.

I think its finally dawning on people around the globe today that this $hit is real, its not going away, and new developments as the situation gets worse can really, really hurt!


European politicians are absolutely delusional to think they're getting themselves out of this. I've switched my outlook from Italy is more than likely to default to it will default.
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Swing low, sweet chariot. Comin' for to carry me home.
jmfcst
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« Reply #53 on: November 09, 2011, 02:14:54 PM »

Dow down 400 points...
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Miamiu1027
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« Reply #54 on: November 09, 2011, 02:17:57 PM »

European politicians are absolutely delusional to think they're getting themselves out of this. I've switched my outlook from Italy is more than likely to default to it will default.

after this from the Wonkish1 rating agency bond yields are expected to soar even high tomorrow.
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Beet
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« Reply #55 on: November 09, 2011, 02:26:37 PM »

Italy must refinance 200 billion euros in the next year, while revenues and expenses are roughly 600 billion euros. Italy has about 75 billion euros worth of gold bullion. If it sells all of its gold bullion, refinancing remains 125 billion euros. If one expands beyond gold to all foreign exchange reserves, Italy has 125 billion in foreign exchange reserves. Refinancing costs fall to 75 billion euros. If the IMF and the EFSF can be persuaded to cover the remaining 75 billion, Italy is solvent for the next year with no revenue-adjusted fiscal adjustment.
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opebo
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« Reply #56 on: November 09, 2011, 03:12:18 PM »

Italy must refinance 200 billion euros in the next year

So.. all of this is over a piddling amount like that?  The ECB could print that in a nanosecond, and everything would be fine.
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Wonkish1
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« Reply #57 on: November 09, 2011, 03:43:47 PM »

Italy must refinance 200 billion euros in the next year, while revenues and expenses are roughly 600 billion euros. Italy has about 75 billion euros worth of gold bullion. If it sells all of its gold bullion, refinancing remains 125 billion euros. If one expands beyond gold to all foreign exchange reserves, Italy has 125 billion in foreign exchange reserves. Refinancing costs fall to 75 billion euros. If the IMF and the EFSF can be persuaded to cover the remaining 75 billion, Italy is solvent for the next year with no revenue-adjusted fiscal adjustment.

I'm aware of that.

Didn't say its going to be soon. Your not accounting for bank recap though either! They will scrounging every Euro they can out of those places just to make good on the Eurowide "no Lehman's" promise. After that its just simply looking at the cost of capital issue and I don't see how you can come to the conclusion that potentially 9%+ 10 years next year isn't going to eventually catch up to Italy given its quantity of sovereign debt.
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SPQR
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« Reply #58 on: November 09, 2011, 03:52:35 PM »
« Edited: November 09, 2011, 03:54:13 PM by italian-boy »

Italy must refinance 200 billion euros in the next year, while revenues and expenses are roughly 600 billion euros. Italy has about 75 billion euros worth of gold bullion. If it sells all of its gold bullion, refinancing remains 125 billion euros. If one expands beyond gold to all foreign exchange reserves, Italy has 125 billion in foreign exchange reserves. Refinancing costs fall to 75 billion euros. If the IMF and the EFSF can be persuaded to cover the remaining 75 billion, Italy is solvent for the next year with no revenue-adjusted fiscal adjustment.

...and ZERO reserves whatsoever?
From bad to worse.

Unless I got your point completely wrong,and you were not suggesting that Italy should indeed sell its reserves,but merely stating what its needs are.
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Beet
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« Reply #59 on: November 09, 2011, 03:54:36 PM »

@opebo: The ECB is not allowed to buy debt directly from governments. Unlike some of its other, errr, unusual traits, that one is actually fairly standard among world central banks. It can only buy on secondary markets.

Italy must refinance 200 billion euros in the next year, while revenues and expenses are roughly 600 billion euros. Italy has about 75 billion euros worth of gold bullion. If it sells all of its gold bullion, refinancing remains 125 billion euros. If one expands beyond gold to all foreign exchange reserves, Italy has 125 billion in foreign exchange reserves. Refinancing costs fall to 75 billion euros. If the IMF and the EFSF can be persuaded to cover the remaining 75 billion, Italy is solvent for the next year with no revenue-adjusted fiscal adjustment.

...and ZERO reserves whatsoever?
From bad to worse.

So what's your proposal, Italian? It's your country. (and yes. I've thrown out about five different proposals. I have certain preferences and beliefs, but right now I'm not completely wedded to any one solution, including this one).
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Wonkish1
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« Reply #60 on: November 09, 2011, 04:04:06 PM »

@opebo: The ECB is not allowed to buy debt directly from governments. Unlike some of its other, errr, unusual traits, that one is actually fairly standard among world central banks. It can only buy on secondary markets.

Italy must refinance 200 billion euros in the next year, while revenues and expenses are roughly 600 billion euros. Italy has about 75 billion euros worth of gold bullion. If it sells all of its gold bullion, refinancing remains 125 billion euros. If one expands beyond gold to all foreign exchange reserves, Italy has 125 billion in foreign exchange reserves. Refinancing costs fall to 75 billion euros. If the IMF and the EFSF can be persuaded to cover the remaining 75 billion, Italy is solvent for the next year with no revenue-adjusted fiscal adjustment.

...and ZERO reserves whatsoever?
From bad to worse.

So what's your proposal, Italian? It's your country. (and yes. I've thrown out about five different proposals. I have certain preferences and beliefs, but right now I'm not completely wedded to any one solution, including this one).

Simple(from Italy's perspective) now that they are in it deep they do what Greece is doing. More austerity, try to get every single Euro you can out of the overly generous European core, and then go through painful debt restructuring when the Euro money runs out. People act like sovereign default is the end of the world. Its not! It sucks really, really, really bad, but give it a few years and you wont even be able to tell.

And if your looking at it from the European core(like Germany) the best thing is to figure out that the rest of Europe is going to keep on using you and suck you dry unless you tell them they are on their own. Since they are likely going to restructure their debts when the money turns off Germany is better to not be in a currency union with a bunch of countries going through debt restructuring. So they need to get the hell out of there.
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Beet
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« Reply #61 on: November 09, 2011, 04:21:56 PM »

Sovereign default is not the end of the world (who said it was?), but it's still pretty bad. To restate the obvious, Italy is a G-7 nation, part of the core of not only Europe but world capitalism. A default would be the biggest economic failure in the capitalist world for 65 years. It's bad enough to consider lots of different alternatives to see if any would be better. Keep in mind what Greece has been through in the past couple years, and they haven't even really defaulted yet. To Greece's 300 billion euros of debt, Italy has 2.5 trillion euros of debt.

Further, from a political standpoint, I don't agree that Italy should keep stringing along the IMF/EU and then default when the money runs out. If default is inevitable, I argue it would be better off defaulting straight away for the following reasons. First, it already has a primary budget surplus, so delaying default only means more interest payments that disappear into nowhere. Second, the IMF/EU will try to force through massive structural changes that the Italian people will not be able to decide upon democratically. It is better to keep economic decisions under the purview of Italy's democratic institutions. Third, look at what has happened to the Papandreou government. It has lost all popularity and credibility. A new government coming in straight off an election with a solid majority, would do better by defaulting straight away and taking as much economic pain as possible in the first year, so that by the third or fourth year when new elections are coming up, a recovery is already visible, as you hinted.

Finally, it is unclear whether or not even a hard default would resolve the problems here. The main examples pointed to (Argentina, Russia, Iceland) all combined default with a currency devaluation. Even after a hard default, is the country were still using the euro, it may not be able to avoid a hard internal adjustment, difficulty which is unpredictable. I cannot think of any historical examples.
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Wonkish1
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« Reply #62 on: November 09, 2011, 04:49:23 PM »

Sovereign default is not the end of the world (who said it was?), but it's still pretty bad. To restate the obvious, Italy is a G-7 nation, part of the core of not only Europe but world capitalism. A default would be the biggest economic failure in the capitalist world for 65 years. It's bad enough to consider lots of different alternatives to see if any would be better. Keep in mind what Greece has been through in the past couple years, and they haven't even really defaulted yet. To Greece's 300 billion euros of debt, Italy has 2.5 trillion euros of debt.

Further, from a political standpoint, I don't agree that Italy should keep stringing along the IMF/EU and then default when the money runs out. If default is inevitable, I argue it would be better off defaulting straight away for the following reasons. First, it already has a primary budget surplus, so delaying default only means more interest payments that disappear into nowhere. Second, the IMF/EU will try to force through massive structural changes that the Italian people will not be able to decide upon democratically. It is better to keep economic decisions under the purview of Italy's democratic institutions. Third, look at what has happened to the Papandreou government. It has lost all popularity and credibility. A new government coming in straight off an election with a solid majority, would do better by defaulting straight away and taking as much economic pain as possible in the first year, so that by the third or fourth year when new elections are coming up, a recovery is already visible, as you hinted.

Finally, it is unclear whether or not even a hard default would resolve the problems here. The main examples pointed to (Argentina, Russia, Iceland) all combined default with a currency devaluation. Even after a hard default, is the country were still using the euro, it may not be able to avoid a hard internal adjustment, difficulty which is unpredictable. I cannot think of any historical examples.

Fair point about the primary surplus already. But keep in mind that a large portion of those interest payments are to domestic banks the more you get in handouts the more you can ween your domestic banks off of holding that debt and onto a different country that your about to screw over. Also keep in mind that the bank issue is why countries don't default and repudiate the entire amount. They always restructure the debts based on their ability to pay. So that does mean that help from other low cost of capital sources makes it easier to restructure with a little less damage to your financial system.

Since I can't think of an example of a country defaulting in a currency union I'll pass on speculating about the issue of devaluation.
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SPQR
italian-boy
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« Reply #63 on: November 09, 2011, 07:24:06 PM »

What I think it's best?
A tecnhocratic government lead by Mario Monti,which can approve the measures asked by the EU (not all of them,since some of them are nonsense),reassure the markets (what kind of credibility did a Berlusconi government have? and one with a 2 votes "majority"?) and change the electoral law,so that after the next elections (presumably in Spring 2012) the majority will not be just "big",but actually stable.

I don't see how defaulting or selling all of our foreign money reserves+gold would help. Especially the second option,would just make us weaker against any speculative attack,and make us depend even more on the ECB.

The default is not inevitable. This is the occasion to solve some of our economic structural problems. What we need is for the markets to trust us in the meanwhile. That is why we need Berlusconi to step down ASAP.
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Beet
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« Reply #64 on: November 09, 2011, 07:34:18 PM »

And what if the markets are not reassured, despite enacting some of the measures asked by the EU? What then?
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Filuwaúrdjan
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« Reply #65 on: November 09, 2011, 07:58:38 PM »

And what if the markets are not reassured, despite enacting some of the measures asked by the EU? What then?

We hang them from lamp-posts.
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Хahar 🤔
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« Reply #66 on: November 09, 2011, 09:40:20 PM »

The markets are jealous gods, and their wrath is not easily assuaged.
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opebo
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« Reply #67 on: November 10, 2011, 03:28:50 AM »

The markets are jealous gods, and their wrath is not easily assuaged.

Actually they are an illusion.  Behind them are specific government policies, not some kind of 'natural forces' independent of the State.
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SPQR
italian-boy
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« Reply #68 on: November 10, 2011, 09:27:29 AM »

And what if the markets are not reassured, despite enacting some of the measures asked by the EU? What then?
A default is not the end of the world.
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Link
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« Reply #69 on: November 10, 2011, 11:01:44 AM »

A default is not the end of the world.

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opebo
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« Reply #70 on: November 10, 2011, 11:24:24 AM »

@opebo: The ECB is not allowed to buy debt directly from governments. Unlike some of its other, errr, unusual traits, that one is actually fairly standard among world central banks. It can only buy on secondary markets.

Interesting, Beet.  That is a predictable limitation, I suppose, but it seems it would be one that could be easily gotten 'round - if the ECB bought up the existing debt at such a rate that it drove up the price, and if 'the markets' had confidence that they would continue to do so with alacrity, then private investors would happily buy all the bonds the Italian government could issue, in order to re-sell them to the ECB at a profit.  Problem solved.
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Beet
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« Reply #71 on: November 10, 2011, 01:42:00 PM »

And what if the markets are not reassured, despite enacting some of the measures asked by the EU? What then?
A default is not the end of the world.

Again, no one said it was the end of the world, but it is a lot of money. I mean, we're talking about an Italian default here. This isn't peanuts. Come on, guys.
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Wonkish1
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« Reply #72 on: November 10, 2011, 06:13:13 PM »

And what if the markets are not reassured, despite enacting some of the measures asked by the EU? What then?
A default is not the end of the world.

Again, no one said it was the end of the world, but it is a lot of money. I mean, we're talking about an Italian default here. This isn't peanuts. Come on, guys.

No question about that! But given the sheer amount of total credit market debt in the world today and the fact that the real deleveraging anywhere is in default, wouldn't you agree that if to much debt = bad that there are some good things that come when defaults occur?

To much debt puts too much of a damper on your ability to grow so I think many people in the world will see a few years after a cluster of sovereign defaults that those countries are doing quite alright given the lack of the public debt drag on their economies.
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SPQR
italian-boy
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« Reply #73 on: November 10, 2011, 06:53:20 PM »

Of course there are better things than a default,and I still believe that it can be avoided...but as long as it's "controlled",there is no reason to believe that Italy will suddenly become like Sudan or Zimbwabwe.

My only fear is on the reaction at an European level.
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Beet
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« Reply #74 on: November 10, 2011, 06:55:35 PM »

Sure, there are some good things that come when defaults occur. I just think the costs outweigh the benefits on this particular default. There may be a time when that is no longer true, but at the present time it is certainly very true, IMO.

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Oh there is no chance Italy will become like Sudan or Zimbabwe. Perhaps Argentina is more like it. But, because you have surrendered your monetary independence to Frankfurt, Italy does not have the power to defend itself from an uncontrolled default.
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