Goldman Sachs on Italy

I would recommend reading the following since many decisions in Europe following the semi-resignation of Berlusconi will be taken by Goldman boys.

From Goldman Sachs:
Italy - What's Next
After seeing his parliamentary majority decline further in a routine vote earlier today, Italian PM Berlusconi offered to resign once Parliament approves new austerity measures, possibly towards the end of next week. We see three possible outcomes at this delicate stage, with different implications for the BTP market and Italian risk premium more broadly:
Most likely scenario: In the coming weeks, the current centre-right coalition of the Northern League and PdL moves to rally round another candidate who can gain wider acceptance domestically and internationally. In order to broaden its support, the new government may reach out to smaller centrist parties which can advance their own political agenda.
A centre-right executive backed by a broader coalition and committed to implementing the ‘troika’s' economic platform could eventually stabilize markets. But the newly appointed Cabinet would need to prove itself first, and the protracted uncertainty would weigh on economic growth. Furthermore, reforming the pension system could meet resistance from the Northern League. Still, it would be hard for the ECB and Italy’s EMU peers not to stand by a new Italian government genuinely trying to pursue reforms. Under this scenario, thanks to the ECB’s interventions, we would expect BTPs to remain capped at around current levels (400-450bp) over the average of Germany, France and the Netherlands until measures are gradually approved.

Second most likely scenario: The centrist parties ultimately turn down the offer to join a broader coalition. In this case, more MPs from Berlusconi’s PdL party could join forces with formations at the centre of the political spectrum. This could pave the way for a government of national unity of sorts, led by a highly reputable ‘outsider’. Like during the crisis of the early 1990s, the advantage of such a ‘technocrat’ government is that it would be sworn in after some ‘initial contracting’ on its programme (economic reforms agreed with the ‘troika’, plus a new electoral law), which should lower the implementation risk. A technocrat government could use its credibility to introduce more growth enhancing measures that would pay off further down the road. Lastly, it could focus on improving governance (fiscal rules in the constitution, a smaller public sector, etc).
We view this as the most market-friendly outcome, as it would lead over time to a decline in sovereign spreads and in Italy’s risk premium more broadly. The front-end would re-price more than intermediate- and long-term maturity bonds because investors would likely take advantage of the rally to reduce exposure at higher prices. Nevertheless, we would expect BTPs to fall to around 350bp over Bunds in fairly short order.
Least likely scenarios: After Berlusconi’s resignation, general elections are called. These could be held in mid-January at the earliest, although they would most likely be postponed until the Spring amid market turmoil.
This would represent the worst scenario for markets, in our view. Since President Napolitano is aware of this, he will probably try to resist dissolving Parliament at this juncture. Also, most centrist parties would want to change the electoral law before a new vote takes place.
All these scenarios will take some time to play out, a couple of weeks at least. In the meantime, the higher priced Italian government bonds will continue to be sold, as gradually higher margin requirements are applied. On our central case, intermediate to long-end bonds should continue to be supported relative to AAA-rated securities by the ECB.
In conclusion, we are most probably approaching the highs in Italian yields (currently around 500bp over German Bunds in the bellwether 10-yr sector, and 600bp in 2-yr maturities), but a volatile and unsettled market remains our base case until Italy’s sovereign creditors can be reassured that long-awaited structural reforms to lift the country’s growth rate will be put in place.

Berlusconi resigned or is he just taking time?

Today the dream of many Italians could have become reality with Berlusconi announcing his resignation after the approval by the end of this month of the austerity budget.
Although my feeling and knowledge of Italian politics would suggest a more cautious attitude.
First he has not resigned yet and he will be in power till approval of the austerity budget, which is supposed to take place at latest by the end of November but given the epic ability of Italian politics to complicate things either willingly or unwillingly could very well last longer regardless of all proclamations of urgency.
Secondly knowing the mindset of Berlusconi he has either struck a deal with the Italian President Napolitano for an amnesty in exchange for his quiet exit from power or he is simply trying to buy time to recover from a majority loss.
It was clear today that Italy was on the edge of bankruptcy if no answer was provided to the total horror of the Italian spread and CDS rates. Italy is clearly weeks if not days away from economic collapse and the total inability of the government to deal with this crisis was shouting for some decisive answer to the markets.
It remains to be seen how many days this resignation promise of Berlusconi will buy before markets will realize that nothing has changed in Italy and that the inability of Italian politics to offer a serious and credible alternative to Berlusconi will not stop the economic collapse.
There is still the thought back in my mind that Berlusconi faithful to his reputation of a shameless crook will pull another trick of his, finding a way to turn this impasse to his advantage. Let's hope it will not be a delaying tactic to block the approval of the austerity package because Italy will be under deep scrutiny and any whiff of fraud will resume the spiral death of the Italian economy.
Furthermore the IMF is going to Rome this week to scrutinize the Italian books as previously done in Greece and we have to hope they will not find ugly surprises or black holes of debt courtesy of our fraudulent still to be Prime Minister Berlusconi.

ECB threatens stopping purchase of Italian Bonds

Three months ago, in exchange for the ECB's purchase of Italian bonds, allegedly the only backstop that has prevented Italian bonds from experiencing an all out collapse to date, Italy was presented with a list of strict "austerity" demands, among which were spending cuts, higher revenues and labor reform. Since then none of these has occurred... or will occur, simply because Berlusconi has no control over the government and cannot care less while taken with more important judicial issues. Well, It appears that the ECB has just made it clear that the status quo is about to end, unless Italy does in fact push with something the ECB will have no choice but to play hard ball. Reuters has just confirmed that The European Central Bank had discussed the possibility ending the purchase of Italian government bonds if it concludes Italy is not adopting promised reforms.
ECB Governing Council Member Yves Mersch said. "If we observe that our interventions are undermined by a lack of efforts by national governments then we have to pose ourselves the problem of the incentive effect," Mersch said according to extracts of an interview with Italian daily La Stampa published today.
The ECB has issued an ultimatum to Berlusconi to get his house in order. The problem is that he can't. Not without stepping down and that will not happen. If the ECB will stop purchasing Italian bonds it will start a death down-spiral on the markets forcing Berlusconi out of power but paving the road to Italy default and economy collapse. We will see how far they will go with the threat and their bluff and how tenacious will be Berlusconi in his preservation fight.
And here is what an ECB ultimatum sounds like:

Asked if this meant the ECB would stop buying Italy's bonds if it did not adopt reforms it has promised to the European Union, Mersch, who heads Luxembourg's central bank, replied:

"If the ECB board reaches the conclusion that the conditions that led it to take a dec
ision no longer exist, it is free to change that decision at any moment. We discuss this all the time."

Since the ECB resumed its bond buying programme (SMP) around three months ago it has purchased some 100 billion euros of government bonds, a majority of which are thought to be Italian BTPs.

Mersch said the ECB did not want to become a lender of last resort to help the euro zone solve its debt crisis and said it was concerned that its job could be made more difficult by governments that "don't meet their responsibilities."

And the punchline:

"Our job is not to remedy the errors of politicians," he said.