Italian Elections increase doubts over long term reforms

Italians head to the polls on February 24-25 and never before the political scenario has been so chaotic and appalling.

We are witnessing new political movements like the 5 Stars movement climbing up to third place in a matter of months and never before we have seen Germany actively entering the Italian political debate to try and keep Berlusconi at bay.

 

All this is adding up to financial uncertainty on the future of Italy and at large of the Eurozone.

Pier Luigi Bersani, who heads the centre-left PD was considered the assumed new prime minister just a few short weeks ago, at least in the Chamber (the lower house of parliament).

It's all up in the air now as Silvio Berlusconi's PDL has staged a massive rally in the polls.

Berlusconi has been on a rampage lately blaming Germany and Chancellor Angela Merkel for the unemployment problems in Italy, promising to refund the hated IMU (property tax) and more exotically declaring that tax evasion is justified.

Beppe Grillo's Movimento 5 Stelle (Five Star Movement) which has been largely ignored in the Italian press has been wildly popular at rallies. Grillo has a chance to come in second place.

Mario Monti, who heads the centrist Con Monti per l’Italia (With Monti for Italy) coalition, is running a very distant 4th.

Poll Blackouts

Officially, pollsters cannot post poll results in a blackout period before the election. That blackout period started February 9. Below Reuters' 8th of February polls.



Those results are misleading because they do not include undecided voters, and the undecided vote is a very large 20-25 percent!

With such little difference between Berlusconi and Bersani, and with huge rallies for Beppe Grillo and Berlusconi, any outcome is possible.

Germany Warns Against Berlusconi

Of potentially more importance, Berlin Warns Italians against Berlusconi

Here are a few examples from the story.

German Finance Minister Wolfgang Schäuble reportedly said (but later denied) "Silvio Berlusconi may be an effective campaign strategist, but my advice to the Italians is not to make the same mistake again by re-electing him."

Polenz, a senior member of Chancellor Angela Merkel's Christian Democrats, said: "Italy needs political leaders who stand for the future. Berlusconi is certainly not one of them."

One Italian bank even went so far this week as to issue a report arguing that a Berlusconi election would almost certainly force the country to apply for emergency bailout aid from the EU. Mediobanca, Italy's largest investment bank, wrote that "a last-minute Berlusconi victory would scare the market sufficiently to put pressure on the spread."

"Silvio the Savior"

Spiegel reports Berlusconi's Faithful: 'Only Silvio Can Save Italy'

Adoration of Berlusconi in Italy remains widespread. In the parallel universe occupied by his followers, there is no room for doubt about Berlusconi and lines are clearly drawn. Silvio is good and the others are bad.

These fans gather at his speeches, like the Saturday rally in Palermo, where thousands crowded into the venerable Teatro Politeama. There were women in long fur coats and fine gentlemen in three-piece suits. Dock workers like Ferrante squeezed with them through the entrance, everyone pushing and shoving each other like adolescents at a rock concert. The hundreds who didn't make it in must stand outside.

Fully a quarter of Italians are prepared to vote for Berlusconi again. It is an astounding degree of homage paid to man who faces allegations of abuse of power and bribery; who faces the scandal surrounding the underage escort Karima el-Marough, alias Ruby Rubacuori; who has been blasted for blatantly misogynistic comments; and who broke many promises as prime minister. Instead, the opposition, left-leaning judges and even the Germans are blamed for all that is not right with Italy.

At best, Bersani will win the Chamber and lose the Senate. That would likely result in a hung parliament.

Anti-German sentiment in Italy is high already. The entrance of German politicians into the battle may fuel that sentiment in a major way.

It is conceivable "Silvio the Savior" pulls off a stunning upset win in both the Chamber and Senate, but a Senate victory would still require a coalition (no party will come close to a majority).

It may be difficult if not impossible for any party to form a Senate coalition if Monti's party does poorly as expected.

Regardless Berlusconi there seems to be no good outcome for Italy.

Germany wants Britain to join soon the Euro

The reality of the Eurozone disaster is evolving faster than many anticipated and governments are struggling to react promptly. Germany has clearly lost any hope to solve the crisis and it is moving to plan B, a two-tier Europe with Britain being dragged inside the core zone to compensate for the loss of Italy and Spain. In the meanwhile despite the Euro riot inside the British Parliament with over 80+ MPs revolting against the Prime Minister on the Euro membership it is quite astonishing to hear from the German Finance Minister that Britain will join the Euro and that “This may happen more quickly than some people in the British Isles currently believe,”. What is going on behind the scene is for all of us to wonder!



From The Telegraph: Britain will have to join the euro, says Tory grandee Lord Heseltine

Britain will soon have no choice but to join the euro, Tory grandee Lord Heseltine has claimed, as tensions grow over the eurozone's slow-moving efforts to get a grip on the spreading debt crisis.

The former deputy prime minister, a long-time supporter of the single currency, said the public had "no idea" about the potential impact its collapse would have on the UK.

But he believes Franco-German determination will secure the euro's future and pave the way for Britain to sign up.

Both the Coalition and the Labour Party have ruled out adopting the euro in the foreseeable future.

Last month Prime Minister David Cameron suffered the biggest ever Conservative revolt over Europe as more than 80 Conservative MPs defied his orders and backed a referendum on Britain’s membership of the European Union.

German Finance Minister Says UK will Join Euro

Please consider Britain 'will join euro before long’, says German finance minister

Wolfgang Schäuble said that, despite the current crisis in the eurozone, the euro will ultimately emerge as the common currency of the entire European Union. He said he “respects” Britain’s decision to keep the pound, but insisted that the survival and eventual stabilisation of the euro will convince non-members to join the currency club. “This may happen more quickly than some people in the British Isles currently believe,” he added.

Mr Schäuble also said Germany will stand firm on its call for a financial transaction tax that Britain believes would badly harm the City of London.

Sir John Major, the former prime minister, warned last night that the growing integration of the eurozone nations threatens democracy in those countries. He told Al Jazeera television that richer euro members led by Germany and France will “insist on moving towards what we call fiscal union. By that I mean common control over budgets and fiscal deficits”.

Sir John, who advises David Cameron on foreign policy issues, also described the banking transaction tax as “a heat-seeking missile proposed in continental Europe, aimed at the City of London”.

Foreign investors dumping Italian bonds

Below the updated breakdown on Italy's Bond Holders as of September (last available data).
ECB has been the main buyer since August 8th, and held 4% of the Italian bond market as of September. Domestic holders, mainly financial institutions (banks) have gradually increased their holdings, taking domestic holding from 55% to 56% of the total market. Foreign investors, consisting of European non-Italian banks and real money investors as well as international asset managers, have been the main seller of BTPs, reducing their holdings from 45% to 39%." As said earlier - nothing at all unexpected: everyone who can get out is getting out. The only buyers are those for whom selling equates to suicide. That said, we wish Italian banks and the ECB the best of luck as they seek to purchase the €741 billion in bonds that are still to be offloaded as Merkel persists in refusing to let the ECB even considering announcing monetization intentions.

Germany is the new master of Europe

Interesting developments on the Euro front:

From the FT:

Our friends and rivals over at The Daily Telegraph have gotten their hands on an interesting document from the German government detailing its proposals for EU treaty change, and have helpfully posted it online (with an English translation by the Open Europe think thank).

Although the Telegraph focuses on its implications for Britain, there is a significant amount of detail on how Berlin would like to change eurozone economic governance, including yet another stab at enshrining bondholder “haircuts” in the EU treaties.

For those who haven’t followed the debate closely, there is now a closed-door fight going on about whether Greece really will be the only country that sees its bondholders pushed into losses – as the eurozone’s leaders have repeatedly insisted in their summit conclusions – or whether the bloc’s new €500bn rescue fund, which could come into place as early as next year, should allow for organised defaults.

Why is this a market moving event?

When broader default powers were mooted for the ESM at this time last year in a much-discussed agreement between France’s Nicolas Sarkozy and Germany’s Angela Merkel in the French seaside town of Deauville, bond markets swooned, sending Ireland and then Portugal into bail-outs. Days later, during a G20 meeting in Seoul, Merkel was forced to back down. But the issue clearly hasn’t died.

In other words, while everyone believes Germany has been boxed into a corner and has no choice but to relent on global demands to let the ECB do whatever France demands, Germany was making other plans all along. Such as having the opion to kick France out of the Eurozone if and when it so chooses.Because after all, money talks. And in Europe, only Germany has the money.

There is more! Reuters is reporting the leak of confidential Irish budget information by German lawmakers and Irish parliamentarians are seething - viewing the leak as 'incredible' and 'unprecedented'. Given the new laws, Germany now has the right to be fully informed about bailout countries' progress before new tranches of funds are paid out. As the Irish Daily Mirror put it perfectly "Germany is our new master."

Reuters: Ireland cries foul after German budget leak

The Irish government has complained to European partners after confidential budget information shared with its EU-IMF lenders was leaked by German lawmakers, sparking a political storm at home.

The media and opposition reacted furiously at the fact that the details of the December budget were presented to German lawmakers before their Irish counterparts, heightening fears that its EU-IMF bailout has undermined Irish sovereignty.

"Germany is our new master," ran a banner front-page headline in the Irish Daily Mirror. Opposition leaders in parliament described the leaks as "incredible" and "unprecedented" and demanded the government explain.

New German laws give its parliament the right to be fully informed about bailout countries' progress before new trenches of funds are paid out and Ireland's main opposition party led cries Germany was now calling the shots in Europe.

Germany is pushing aggressively for EU treaty change to create tighter fiscal discipline across the bloc and a spokesman for its finance ministry said there was a clear procedure allowing parliament to see confidential documents belonging to countries in EU/IMF programmes.

...

The leader of Ireland's largest opposition party said voters were entitled to an explanation of why the information was given to European partners before Irish lawmakers.

"I think it will be damaging in the sense that it plays to a narrative that Germany is calling shots all over Europe," Fianna Fail leader Michael Martin told Reuters.

"It will damage sentiment towards Europe and that is a problem."

Wikileaks cable reveals Germany conundrum over Euro

The following is an integral Wikileaks cable issued on the 12th of February 2010 from US Ambassador to Germany, worth reading to understand what is going on behind the scenes:

C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 000181

SIPDIS

STATE FOR EEB (NELSON, HASTINGS), EEB/IFD/OMA (WHITTINGTON), DRL/ILCSR AND EUR/CE (SCHROEDER, HODGES) LABOR FOR ILAB (BRUMFIELD) TREASURY FOR SMART, ICN (NORTON), IMB AND OASIA SIPDIS

E.O. 12958: DECL: 02/12/2020
TAGS: EAID EFIN ECON PREL EUN GM GR PGOV
SUBJECT: GERMANY RELIEVED BY EU SUMMIT OUTCOME ON GREECE

Classified By: ECONOMIC COUNSELOR INGRID KOLLIST, REASONS: 1.4 (B) AND
(D)

¶1. (C) SUMMARY: Chancellor Angela Merkel's government welcomed the decision taken at the EU's February 11 informal summit in Brussels not to provide financial assistance, for the moment, to cash-strapped Greece. German officials believe a bailout is not needed at this time, and that extending a lifeline to Greece would have carried too many risks. One major fear in Germany is that "saving" Greece would lead to other needy Eurozone members expecting the same treatment. Another concern is that extending an explicit guarantee for Greece could weigh on Germany's own good standing in the markets, ultimately raising its borrowing costs.  While German government officials do not totally rule out an IMF program for Greece if push came to shove, most consider this eventuality highly unlikely, especially in light of the European Central Bank's strong opposition.  In fact, the German government, the ECB and private German economists are downplaying the seriousness of Greece's predicament and its potential impact on stability of the Euro.  They agree, however, that the crisis could have longer-term consequences for EU institutions and how they interact with member states that stray off course.  END
SUMMARY.

NOT IN THE MOOD
---------------

¶2. (C) Prior to the February 11 EU Summit in Brussels, there was much hair pulling in Berlin over the wisdom of participating in some sort of Greek rescue. No one savored the idea of explaining to German taxpayers, already concerned about Germany's record deficit, that they would be footing the bill for the irresponsible behavior of another country. A Finance Ministry official explained to us that many Germans felt disgusted by the situation in Greece: "While Germans have spent the past decade tightening their belts and improving their competitiveness, Greek civil servants still earn 14 months' salary per year."  A recent editorial in the German daily Frankfurter Allgemeine Zeitung (FAZ) asked rhetorically whether Germans would need to work until age 69 just to finance early retirement for Greek workers.  With important upcoming elections in the state of North Rhine-Westphalia, bailing out Greece would not be a vote winner.

OFF THE HOOK
------------

¶3. (C) The German government was, in fact, "relieved" that the European Council meeting on February 11 decided not to put concrete assistance on the table at this time. Wolfgang Merz, Director for European Financial Affairs, German Ministry of Finance, told us that while Germany stands ready to throw a lifeline if the Greek government truly runs aground, Greece currently has access to capital markets and needs no outside assistance. The key to overcoming the crisis will be the Greek government's implementation of the planned austerity measures, said Merz. Bernhard Speyer, Head of Banking, Financial Markets and Regulation at Deutsche Bank (DB) Research, agreed that the EU struck the right balance: "The decision gave reassurances that Greece would not be abandoned, but kept the pressure on the Greeks by not yet putting cash on the table."

¶4. (C) Stepping in with assistance at this point carried too many downside risks, according to Merz. Legal questions aside, a German or EU bailout of Greece might have harmed Germany's credit worthiness, thereby raising its own borrowing costs. Merz added that a bailout would certainly have set a bad precedent for other Eurozone countries, such as Spain and Portugal, experiencing similar stresses. (Merz acknowledged, however, that these two countries' problems were less acute -- a sentiment echoed by Speyer.)

¶5. (C)Still, there is some skepticism that Greece's austerity program will get the country's finances on the right track, even if fully implemented. Merz said an IMF bail out remained on the table, despite the official line that the situation in Greece could be addressed within the EU.

IMF RESCUE? RESOUNDING NO FROM ECB
----------------------------------

¶6. (C) According to Karlheinz Bischofberger, Deputy Head of the Financial Stability Department at the European Central Bank (ECB), the likelihood that the IMF will be asked to bail out Greece is "zero." Greece does not have a balance of payments crisis, so there is first and foremost no basis for the IMF to step in. Bischofberger added that apart from the damage to the ECB's reputation an IMF intervention would inflict, it was uncertain that the IMF could even succeed in doing the "political dirty work" of forcing Greece to implement a structural adjustment program. DB Research's Speyer concurred, adding that [and IMF intervention] would undermine the credibility of EU institutions to manage a crisis.

REPORTS OF MY DEATH ARE GREATLY EXAGGERATED
-------------------------------------------

¶7. (C) Talk of a possible break-up of the Eurozone is "absurd," according to Moritz Kraemer, Managing Director, Standard and Poor's. He noted that Eurozone membership is still seen as highly desirable, and there was absolutely no incentive to exit, despite the allure of devaluation. Any country that tried to leave the Eurozone would get hammered in the credit markets, exacerbating any underlying structural problems. S and P estimates that Greece's rating in the case of an exit would drop to "BB " or lower, i.e. below investment-grade. Even today, Greece's rating of "BBB " is higher than it was in 1997 ("BBB-") before joining the common currency. [ZH: HAHA]

¶8. (C) While the current crisis may have revealed an "Achilles heel" of the Eurozone, it may present opportunities, according to Klaus Masuch, Head of the EU Country Division, Directorat General of Economics, ECB.  The crisis is a "healthy warning signal" that Eurozone members must conduct "sound national policies in line with the agreed rules."  It also underlines the necessity of better integration and coordination of member state fiscal policies. 
The Euro will come out of this crisis strengthened, he said.
Better and stricter early warning and surveillance systems will be in place, and the Stability and Growth Pact will ultimately be reinforced. DB Research's Speyer agreed, adding that the crisis could make EU member states proceed more cautiously with enlargement.

A EUROZONE CHAPTER 11
---------------------

¶9. (C) DB Chief Economist Thomas Mayer told Ambassador Murphy he was pessimistic Greece would take the difficult steps needed to put its house in order. A worst case scenario, says Mayer, could be that Germany pulls out of the Eurozone altogether in 20 years time. In 1990, Germany's Constitutional Court ruled that the country could withdraw from the Euro if: 1) the currency union became an "inflationary zone," or 2) the German taxpayer became the Eurozone's "de facto bailout provider." Mayer proposes a "Chapter 11 for Eurozone countries," which would place troubled members under economic supervision until they put their house in order. Unfortunately, there is no serious discussion of this underway, he lamented.

COMMENT
-------

¶10. (C) Chancellor Merkel is clearly relieved she does not, for now, have to explain to the public why the German government is running up its own deficit to bail out debt-laden Greece. Still, the German government appears prepared to step in as a last resort if needed and is cognizant that German banks (such as Hypo Real Estate and Deutsche Bank) and insurance companies (Allianz) have significant exposure to Greek sovereign debt. The crisis is also viewed -- within the German government as well as within the ECB -- as a way to exert greater influence over the public finances of profligate Eurozone members. Some Christian Social Union (CSU) politicians are even using the crisis to promote the candidacy of Bundesbank President Axel Weber as next ECB President, arguing that Weber's selection would send a signal that Eurozone stability is paramount. [ZH: Axel Weber was passed over for the post of ECB head and instead former Goldman staffer Mario Draghi was appointed] One way or another, the consequences of the Greece crisis seem likely to outlive the immediate situation. One strong possibility is that German influence over policy in the common currency area will grow.

European leaders on the verge of a nervous breakdown

Eurozone is in deep trouble and that was known since time but It seems that finally European leaders have aknowledged the seriousness of the situation and are starting to panic.
The weekend long Euro meeting is reaching red alert levels as European leaders are becoming nervous wrecks and going for the jugular.

The Guardian reported today the following:

The eurozone's two biggest powers, Germany and France, on Sunday launched an unprecedented attack on Italy to stop the rot by taking far more radical measures to reform its economy and get its debts under control.

The German chancellor, Angela Merkel, and Nicolas Sarkozy, the French president, held a series of face-to-face talks with the Italian prime minister Silvio Berlusconi – who was then subjected to a roasting at the hands of other European leaders who are worried that the EU as a whole is on the verge of another deep-rooted recession.

The onslaught on Berlusconi, now viewed as a liability across the whole of Europe, came as a fractious summit of the 27 members of the EU ended and an equally stormy eurozone summit began with no agreement on all three core elements of a package to solve the sovereign debt crisis and restore market confidence.

While Berlusconi was grilled another faultline opened with David Cameron embroiled in a furious row with Nicolas Sarkozy over Britain's role in talks to solve the crisis enveloping the euro.

 

The bust-up between Cameron and Sarkozy held up the conclusion of the EU-27 summit for almost two hours, with the French president expressing rage at the constant criticism and lectures from UK ministers.
Sarkozy bluntly told Cameron: "You have lost a good opportunity to shut up." He added: "We are sick of you criticising us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings."

On Monday the prime minister is facing both the largest Commons revolt of his premiership and the largest rebellion of eurosceptics suffered by a Conservative prime minister when parliament votes on whether the UK should have a referendum on Europe.

Officials who witnessed the angry exchanges between Cameron and Sarkozy said the prime minister insisted that the package to be adopted on Wednesday by the 17 eurozone countries had serious implications for non-euro countries in the EU and their interests must be safeguarded. Eventually, after what Donald Tusk, the Polish prime minister, who chaired the summit, called a "stormy" discussion, the French president secured an agreement that all 27 leaders will first debate the three-pronged package of measures to recapitalise banks, build up the bailout find and write down Greek debt, but then the eurosummit would have the final say at back-to-back summits on Wednesday.

 

EU Meeting Update

The release of the Troika report seemed to bring events this weekend in Europe to an early halt, according to SudDeutsche.

The Telegraph reports on some choice turns-of-phrase among the leading players, our favorite being:

"It was grim. The worst mood I have ever seen, a complete mess," said one eurozone finance minister.

SudDeutsche reports was in the Troika debt sustainability report (via Google Translate).

The numbers that the Troika on Friday evening on the debt situation in Greece is presented, have altered the agenda of the Euro-Finance completely. Really wanted the department heads to advise [if] they need to convince the country's private creditors to agree on a bigger discount on the bonds held by them, than the previously planned 21 percent.

But the "if" was suddenly a "how high?". Because the inspectors of the Greek lender describe in their "debt sustainability report," a scenario that far surpasses any fears. The country needs even under "normal" conditions, so if everything goes as planned with the reforming and saving, at least 252 billion euros , by 2020 to get back on its feet.

If the economy collapses further, state enterprises can not be privatized as hoped, nor do the reforms [produce the] € 444 billion needed to [please] the inspectors. So it is suddenly clear: the euro rescue fund EFSF is hardly sufficient for more countries to save, and his successor, the latest from 2013 operational ESM also not good.

Furthermore:


"It is clear that a substantial debt cut is necessary," however, said Swedish Finance Minister Anders Borg....

The Exchequer George Osborne sharply criticized the actions of the euro partners: "The crisis in the euro-zone causes major damage in many European economies, including Britain," he shouted in Brussels, adding: "We have had enough of short-term measures, it is enough ... with measures that bring us through the next few weeks. " Europe must tackle the causes of the crisis.

... The Luxembourg Foreign Minister Jean Asselborn announced immediately to resist. "What we need now is rest and no whip," he said.

A stronger economic cooperation is also possible on the basis of existing treaties. "It is important that we do not open another front," said Asselborn. "It can not be that domestic political considerations of even the greatest country outweigh everything."

It was clear that the reality of the size of loan required to 'solve' Greece alone will likely leave the cupboard bare:

Jan Kees de Jager, the Dutch finance minister, told colleagues: "We've got to get real. People are talking about new defences but with one gulp the whole €440 billion could be gone, leaving the eurozone with no protection at all."

Schaeuble-to-Everyone:

According to insiders, Wolfgang Schaeuble, Germany's finance minister, could not resist taking an "I told you so" approach - he had been, after all, the first to call for an "orderly" default for Greece 18 months ago, at a time when the cost of such a move was less than one third of the price today.
"Schaeuble is a man who does not mince his words, whose reputation for harshness and arrogance is well earned. He was, frankly, unbearable," said one diplomat.

And Baroin (France) to IMF swiftly followed by Lagarde (France/IMF)'s slapdown:

Francois Baroin, the young and inexperienced French finance minister,
attempted to hit back, complaining that the IMF's default medicine would hit
France the hardest; the country's banks are highly exposed and could
threaten its "untouchable" AAA rating.

But Mrs Lagarde, who had held his post until taking up the IMF job this
summer, "shut him up" by brandishing the report and pointing to it
its detailed figures. "She really slapped him down - and in perfect
English too, a language he cannot speak," said a diplomat.

We suspect many of the attendees (finance ministers) have not actually spoken to one another, read any serious research, or even attempted to comprehend the whole-versus-the-single sub-optimal decisions they face (until very recently) as their voluminous outbursts were incredible:

"Their shouting could be heard down the corridor in the concert hall where an orchestra was about to play the EU's anthem, Ode to Joy," said an incredulous EU official.

It did not stop there as the pointlessness of the meeting was highlighted as it became increasingly clear that the good old Franco-German comradeship may be fraying at the core and at the edges and without them.

Finance ministers - including George Osborne, the Chancellor - expressed frustration on Saturday that their emergency meeting could take no decisions of substance until Mrs Merkel and Mr Sarkozy had buried the hatchet.

"This Ecofin meeting has been reduced to an academic seminar, an exercise with absolutely no purpose," complained one finance minister. 

Deutsche Bank, Credit Suisse, slam Euro recovery plan

It seems major events are ready to unfold and major games are being played right now to manipulate events and critical decisions that will have to be taken this week.

First we have Credit Suisse saying 66 European banks will fail the 3rd stress test, and will need hundreds of billions in fresh capital, something the market ignored entirely last week but that may be re-evaluated now that Germany is shattering the sweet dreams of business as usual with today's Schäuble and Merkel declaration. And few hours ago inexplicably, we have Deutsche Bank warning that France may well be put on downgrade review by year end.

"We highlight in this note that the French corporate sector is already financially stretched, with poor profitability and large borrowing requirements. We consider that the deterioration in economic conditions is now creating a distinct risk that France could be put under “negative watch” by the rating agencies before the end of this year. We think that France has the wherewithal to react to such an outcome and could avoid an outright downgrade by taking corrective measures quickly, but this naturally would be a very sensitive political decision a few months before a major election."

Why Credit Suisse or Deutsche Bank are starting to fore-say doom and gloom while putting at risk the recapitalization of banks all over Europe I have no idea. But something serious and dangerous is incoming.

Berlusconi's wiretap scandal spinning out of control

There is a major event unfolding in Italy which could have huge ramifications and damage the country at a critical moment in its history. What started as another sex scandal involving Prime Minister Berlusconi is getting completely out of control and risking to escalate to a major diplomatic incident if not worst.


From The Guardian:

Police this month arrested the alleged purveyor of women for Berlusconi's parties, Giampaolo Tarantini, and his wife, on suspicion of blackmailing the prime minister through an intermediary.

The prosecutors believe more than €500,000 (£438,000) was handed over.
According to leaked wiretap transcripts published on Thursday, after it was reported that an investigation had been launched, Berlusconi told the intermediary he should stay abroad. He reportedly added: "I will of course exonerate everyone."
Prosecutors in Naples have said they believe the money was paid to prevent Tarantini contradicting the prime minister's insistence that he was unaware the women, some of whom spent the night, were paid.
The prosecutors want to question Berlusconi, but he has avoided an encounter. This week they announced that, if he continued dodging them, they would ask a judge to order the police to bring him in.

Furthermore today's International newspapers got their hands on wiretaps of Berlusconi's conversations. We do not know yet the full content but it must be atomic material since Berlusconi today in the midst of a major economic crisis found time to try and pass a law banning wiretaps, after a rejection in the Parliament he rushed to visit the Italian President asking or rather begging to sign into law an emergency decree blocking wiretaps.
The Italian President diplomatically refused to sign and invited Berlusconi to be questioned by judges to avoid further turmoil in the country.
Berlusconi insisted in return to at least stop the wiretaps involving comments on foreign leaders and mentioned that if they will come out on the press they will destroy not only him and his government but will destroy Italy as well.
Few hours later the first wiretap has been published by major newspapers all over the world and read as such:

Italian Prime Minister Silvio Berlusconi reportedly called German Chancellor Angela Merkel "culona inchiavabile" during a July phone conversation with an Italian journalist that was recorded by investigators. According to The Daily Mail the phrase roughly translates to "unfuckable lardarse." The comments were recorded during an investigation into an extortion plot against the Italian prime minister. In the same call, he also described Italy as a "shitty" country.

It appears this could be just the starter of a wave of revelations that risk toppling down Berlusconi's government.
There are over 1000 wire taps and most of them probably leaked to newspapers where it seems there is trash on everyone, how many of them at one stage or the other will be published it remains to be seen.

Greece is assumed to default in a matter of days

It appears the end game for Greece is approaching fast and Italy appears to be next in line.

Bloomberg reports Germany Said to Ready Plan to Help Banks If Greece Defaults

Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.

The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.

The existence of a “Plan B” underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro. German lawmakers stepped up their criticism of Greece this week, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress.

Greece is “on a knife’s edge,” German Finance Minister Wolfgang Schaeuble told lawmakers at a closed-door meeting in Berlin on Sept. 7, a report in parliament’s bulletin showed yesterday. If the government can’t meet the aid terms, “it’s up to Greece to figure out how to get financing without the euro zone’s help,” he later said in a speech to parliament.

Longer term, euro countries will “only preserve the common currency if there is more integration” in the European Union, Merkel said in a speech in Berlin today. The EU “won’t be able to avoid treaty change.” While intensive discussions lie ahead and the path won’t be easy, policy makers “shouldn’t be afraid” of tackling the challenge, she said.

And this email is making the rounds and catching most traders' attention:

From colleague: trader friend just hit me with the following: There is “Chatter” in the market of a Greek Default this Weekend - and their CDS is over 400 wider…  Soc Gen is off 7% on exposure - German CDS more expensive than UK;s - despite the ballooning in the CDS prices for Lloyds and RBS.

Greece could default and leave the euro by March

Both the WSJ and Reuters reports that the second Greek bailout, following repeated and consistent disappointments by Greece which has resolutely refused to comply with the terms of its fiscal austerity program, has just collapsed.

"I expect a hard default definitely before March, maybe this year, and it could come with this program review," said a senior IMF economist who is keeping close tabs on the situation.

"The chances for a second program are slim."

It is not only Greece - Italy also thought it would sneak by with getting quid pro no and continue leeching off of Europe, or specifically Germany, indefinitely, at least until the ECB said that absent Berlusconi taking austerity seriously that implicit ECB support for Italian bonds would be cancelled, sending the second most indebted country in the world into a toxic debt tailspin.
From the WSJ:

Talks over new bailout funds for Greece were suspended Friday amid disagreements over how to fill a government-deficit gap that once again is veering off track, raising doubts about the country's future access to finance and triggering renewed nervousness in financial markets across Europe.
The suspension pushed yields on Greek government debt to levels indicating that investors see a default by Athens soon as a near certainty: Interest rates on one-year paper blew out past 70% and two-year yields rose close to 50%.
The continent's stock markets also retreated, with the French market down 3.6% and the German market down 3.4%.
The suspension of the talks in Athens between the government and a group of officials representing the providers of Greece's bailout cash came, officials said, amid a dispute about how to address new gaps opening up in the government budget deficit.
"The Greek side insisted the missed targets are the result of the recession. The troika said recession played a part, but Greece basically didn't keep up with its commitments, so more measures will be needed to make up for the lost ground," said a person with direct knowledge of the talks.
"There is a clear disagreement that can't be bridged today," the person added.
"I expect a hard default definitely before March, maybe this year, and it could come with this program review," said a senior IMF economist who is keeping close tabs on the situation. "The chances for a second program are slim."
Failure of Greece to meet its targets, growing reluctance by some euro members to continue lending and the fact that private-sector participation in a second bailout won't significantly alter Greece's debt profile are the primary factors, the IMF official said.

It gets worse: as Reuters confirms, the political turmoil has already spread to Germany, where all that is needed for wholesale conflagration that will sweep Merkel out of the cabinet is a tiny spark. This may just have been it:

Christian Lindner, general secretary of the Free Democrats, (FDP) junior coalition partners in Chancellor Angela Merkel's center-right government, said Athens was endangering European solidarity.
"The breakdown of talks between the Troika and Greece is a blow to the stability of the euro," he said at a news conference in Berlin.
Referring to Greece's failure to meet deficit targets set in exchange for a second bailout package, Lindner said Athens was shirking responsibilities to which it had agreed.
"This is not about non-binding statements of intent, but contractually secured reciprocity for the emergency loans," he said. "We insist these agreements are observed."
Separately, senior FDP official Hermann Otto Solms, a vice-president of the Bundestag and an economy committee member in parliament said since Greece could not handle its debt problem and it should consider leaving the euro.
"It should be considered whether a restructuring and exit from the euro would offer better perspectives for the currency union and Greece itself," he told Frankfurter Allgemeine Sonntagszeitung.
The pro-business FDP styles itself as a defender of the German taxpayer, a stance Lindner reiterated in his statement over Greece.
"Taxpayers in Northern Europe and especially Germany cannot accept inability or reluctance. In the eyes of the FDP, Greece must reaffirm its will for stability and reform."

A Greek departure from the Eurozone, which now seems inevitable, will have a major impact on Europe's financial institutions.

German coalition split on increasing EU's bail-out fund

Important members of Chancellor Angela Merkel's coalition in Germany are resisting plans for an increase in the EU's bail-out fund to protect Spain from contagion, complicating a crucial meeting of EU finance ministers on Monday.

French President Nicolas Sarkozy and German Chancellor Angela Merkel. Photo: AFP

8:08PM GMT 16 Jan 2011

Guido Westerwelle, the vice-Chancellor and head of the FDP Free Democrats, said there was no justification for last week's call by Brussels for an urgent boost in the size and powers of the €440bn (£371bn) fund.

"Only a small part of the fund has been used, so there is no need to talk about increasing it," he said, adding that any further aid must come on stringent terms.

The FDP's finance spokesman, Otto Solms, said the party's parliamentary group would oppose an expansion of the fund, and warned that it must not become a "bad bank" by purchasing EMU bonds pre-emptively.

European Commission President José Manuel Barroso is worried the fund will run dry if Portugal needs a rescue, leaving too little to defend Spain. A leaked Commission document said a fresh pulse of the crisis was "unavoidable" in early 2011.

read entire article at: http://www.telegraph.co.uk/finance/economics/8263071/German-coalition-split-on-increasing-EUs-bail-out-fund.html