Great Depression 2.0

FDR Memorial Site, Washington DC

Yesterday in my post after hearing the declaration of Prime Minister Berlusconi I wrote my conclusion that Italy had lost effectively sovereignty becoming a protectorate of the ECB.
Today we have even an official confirmation that Italy is now administered by the ECB under mandate of France and Germany which are the new masters of the country and will dictate to Trichet (then Draghi in October) what he has to order Italian politicians to do.
This is major news which has been reported so far by only one Italian Newspaper Repubblica.
EU president Van Rompuy and EU Commissioner Olli Rehn contacted Berlusconi and made clear that either Berlusconi follow orders or it is the end game.
It has been confirmed that France, Germany and the USA have reached the conclusion there is no other solution than seizing power in Italy and run the country as they see fit in order to prevent its default and an economic armageddon.
Both the EU and Washington have decided with the "Washington Consensus" that unreliable governments will fall under protectorate rules, bailout money provided only if following orders.
Berlusconi and the entire Italian political class will be mere puppets who will enforce any order they receive regardless of the electorate opinion. After all, the current state of Italian politics is perfect, Italian voters are currently unable to decide the name of the person they elect, they can only decide which party to vote, the name of the elected MPs are decided by the party, this is causing a major disconnection of responsibility toward the electorate which favour the implementation of blood and tears austerity measures.
Italian MPs do not have any allegiance to their voters but only to their party and their boss and therefore will not have any constraint in following the lead when requested to.
Berlusconi has been forced to accept the dikat but if with his collapsing popularity both among the electorate and with other coalition parties he will be able to implement it, well this is a different story.
Tremonti is right when he said yesterday that this week the world has changed forever, we are in uncharted territory and following US credit rating downgrade we are on the verge a major financial breakdown. Even China's traditionally diplomatic aplombe is being tested with furious official attacks to the US Government.
Events are turning sour fast and the choices left to solve the Global Crisis are getting worse every day.
News from Germany today are complicating things even more: Der Spiegel anticipated today
that Germany is opposing any EFSF increase and any bailout of Italy, it appears it is opposing also ECB purchase of Italian bonds and it is pretending harsh cuts in Italy regardless.
According to Daiwa's Head of Economic Research, Grant Lewis, the increase of the EFSF should reach the astonishing amount of 3.5 trillion euro this is the only act that could convince financial markets of euro area resolve to save Italy and Spain. Lewis says: "France, Germany contribution to EFSF’s capital would increase to 80% if Spain, Italy had to drop out of guarantee structure. France, German contingent liabilities would be > 50% of GDP if EFSF expanded; added to France, Germany current debt it may trigger downgrades to both countries."
There is no safe option anymore if the debt crisis spreads to France as it is becoming probable given the exposure of France to Italian Treasury bonds for over 25% of its GDP, the bailout system will become useless, if they pursue harsh austerity measures in Italy the country will start to paralyse ending like Greece and given the size of the Italian economy effectively pushing the global economy in Depression zone.
If Germany is successful in blocking both the EFSF increase and the ECB purchase of Italian bonds, the Eurozone is dead and will break apart.
Even if the Italian government has agreed in principle to the enforced austerity will face a revolt both from the opposition, the unions and the Italian people whose patience with a rotten and corrupt Berlusconi's government was reaching boiling point already before this last crisis.
The amount of things that can go wrong and turn into a Black Swan are too many at this stage to discard a possible incoming Great Depression. Brace yourself!

Italy Surrendered!

Quite a show, 1 week of bear markets and attack of speculators to the Italian bonds have been enough for Italy to surrender, give up sovereignty and sell the country to the best bidder.
After all that was to be expected when a Prime Minister with the credibility and authority of a pimp is running the 7th world economy like a feudal manor.
So what is the deal? ECB will start buying Italian bonds in exchange for a full emergency austerity package (diplomatically called structural reforms) which in a first draft should include the following:

Reach a positive balance in 2013
Include in the Italian Constitution the compulsory provision for a balanced budget
reform of the labour market (aka fire everyone who is not strongly connected to a politician and condemn an entire generation to underemployment at best)
privatize EVERYTHING! (aka Fire sale of EVERYTHING THEY CAN SELL)

The only positive note is that finally Berlusconi stopped telling jokes, he started finally his speech with a serious note and this should give us an idea how serious the situation is even considering that only yesterday he was spitting jokes on the markets and dismissing the importance of the events.
It seems now the markets have the devoted attention of the Prime Minister and if the discussion only yesterday was in regards to MPs pilgrimages to Holy Land and extended holidays after a prompt telling off from both EU and USA our lap dogs have finally turned serious and are even staying in Rome during the summer to work on the prompt execution of their new masters' orders.
Of course it is very easy to convince a Prime Minister who is charged with countless crimes ranging from bribery to child prostitution and whose first goal is to stay in power to skip jail time.
Italy and Spain have officially entered the death spiral. They will start tax to death to enforce the ECB diktats and in 1-2 years will face the same situation of Greece with eroded tax base while loss of productivity will plunge them in a deeper depression and social upheaval.
The scariest part is that Italy is already now facing a serious social emergency; in order to reach a balanced budget the amount of cuts required will unleash a destruction of the country's social cohesion. We are facing a possible social explosion  when the fabric of public jobs-for-life will disintegrate and a lot more young people will be pushed in the hopelessness territory.

Italy crisis and the Pilgrims to the Holy land!

Quite a day for the Euro and Italy. I will not repeat all the data sufficiently covered at this time by media all over the world.
Enough to say that Milan Stock Exchange has tumbled 2.53% today going down almost 15% since the start of this year while Italian debt reached a post-EMU high of 6.22pc before retreating a little bit at the end.
Anthony Peters from Swissinvest says large clients have been telling asset managers to eliminate Southern European risk. "They have kissed peripheral Europe good-bye," he said.
In the meanwhile, Italy's president Giorgio Napolitano held a second meeting in days with central bank chief Mario Draghi, the future head of the ECB. There has been speculation in the Italian press that the well-respected Mr Draghi might be called to lead an emergency government to restore market confidence.

Finance minister Giulio Tremonti invoked the country's financial crisis committee on Tuesday as the Milan bourse fell to a three-year low, once again led by bank stocks.
Fiat fell 6pc after an 11pc drop in Italian car registrations in July.
Banks were massacred with total yearly losses for some banks amounting now to 45% in details: Unicredit -5,7%, Ubi banca -5,5%, Intesa Sanpaolo -5,2%, Popolare di Milano -5,04%, Mediobanca -4,59% , Banco popolare -4,3%.

Spain Prime Minister faced with similar losses cancelled his holidays to monitor the deteriorating situation.
You would expect amid all this turmoil that Italian politicians would stay and control the situation as well, right!
Well wrong, they are ready to pack and leave for holidays tomorrow until the 12th of September.
They will assist Prime Minister Berlusconi referring to the Parliament about the recent turmoil on the markets and then insanely will fly away to their holiday destinations.
Berlusconi dealt another blow to the reputation of his government today declaring he wants to be in charge of the Ministry of Finance ad interim practically pushing Tremonti in a corner and putting himself in charge of the Italian economic policies during this major crisis.
The first thought coming to the mind of every investor listening to this news must have been " We are screwed" as for the Catholic Italians it must have been "God Save Us!"
Undoubtedly bad news which require some serious reflection and meditation that is why the motivation brought by the government for such an extended summer holiday is the following:

The President of the MPs for the governing PDL Party Fabrizio Cicchitto replied that his decision to allow for such a long summer closing is due to the September Pilgrimage to the Holy Land where annually over 170 MPs are flocking to meditate and pray.
I join the chorus of astonished Italian citizens praying for a divine intervention we are clearly running out of options here!

Italy's Monday Madness

Italy has officially entered the hit parade of the Eurozone victims and it has rightfully taken the pole position shadowing immediately any other country.
Greece and Portugal are no longer a problem if next week the market will keep shooting on the Italian treasury bonds and if a clear sign from both Rome and Frankfurt will not be passed to the bond vigilantes.
Few days more like Friday and we are facing potentially a Lehman collapse multiplied 10+ times.
That this situation is getting out of control is demonstrated by today's pre-emptive declarations in view of tomorrow's Black Monday on the european markets.
The first pre-emptive strike came today from the EU summoning an emergency meeting tomorrow on the Italian situation, after scaring everyone with this sudden move they tried to diminish the event saying it was about Greece and Portugal and they will talk marginally and briefly about Italy, after noticing that it was too a pathetic attempt to cover up the real subject of the meeting they went on confirming that it was not about Italy but was going to discuss about the Italian crisis (reading: we are scared and we do not know what to do).


In the meanwhile the usual unnamed European Central Bank source was quoted telling Die Welt newspaper on Sunday that "The existing rescue fund in Europe is not sufficient to provide a credible defensive wall for Italy," the central bank source was quoted telling the newspaper in an advance text of an article to appear on Monday.
"It was never designed for that," the source added.
The newspaper said that the rescue fund might have to be doubled to up to 1.5 trillion euros. But it was not clear if it was the central bank source calling for the increase. Regardless this is sending a message to international investors that the ECB would be unable to shield Italy if push come to shovel. Either this is an insanely naive declaration or the message is forget a bailout of Italy if the situation get dire next week. Furthermore even if it was doubled Spain is facing a bigger spike than Italy on yields and once this escalate it would be impossible to bailout 2 of the biggest economies in Europe which would be followed almost immediately by France.
Right to the point as usual and back to writing right in time for the epilogue Ambrose Evans Pritchard in his article on The Telegraph is clearly outlining the sorrow state of Spain and Italy.

A brief excerpt below:

If the ECB's Jean-Claude Trichet is right in claiming that Europe was on the brink of a 1930s financial cataclysm a year ago - and I think he is - it is hard see how the threat is any less serious right now.
Yields on Italian 10-year bonds hit a post-EMU high of 5.3pc on Friday. This is not just a theoretical price: the Italian treasury has to roll over €69bn (£61bn) in August and September; it must tap the markets for €500bn before the end of 2013. The interest burden on Italy's €1.84 trillion stock of public debt is about to rise very fast.  
Spanish yields punched even higher, through the danger line of 5.7pc. The bond markets of both countries are replicating the pattern seen in Greece, Portugal, and Ireland before each spiraled into insolvency. And the virus is moving up the European map. French banks alone have $472bn (£394bn) of exposure to Italy and $175bn to Spain, according to the Bank for International Settlements. 
Italy's premier Silvio Berlusconi has chosen this moment of acute danger to undermine his own finance minister, Giulio Tremonti, the one figure in his cabinet respected by global bond vigilantes. "He's not a team player, and thinks he's genius and that everybody else is a cretin," said Mr Berlusconi.
Meanwhile, Mr Tremonti is living free in the Rome house of a political ally just arrested on corruption charges. Resignation rumours circulate hourly. You can hear the knifes sharpening.
"The government ceased to exist months ago," wrote Massimo Giannini in La Repubblica.
"What other country would allow itself the suicidal luxury of offering cynical markets such a spectacle of political disintegration and institutional decay at a time when Europe is destabilized by Greece's sovereign debt and haunted by contagion? We have a band of poltroons dancing under the volcano, and the volcano is about to erupt." 
The PMI data for Italy and Spain have dropped below the recession line. The Goldman Sachs global PMI indicator shows that 80pc of the world is tipping into a slowdown, including India and China. Taiwan's bell-weather exports to China sank 12pc in June from the month before. 

Italy: a coming Black Swan?

Quite a day for Italy, a brief recap of the recent events:

UniCredit was two hours ago down over 8%, well beyond the 6.5% when it was halted at by the Milan Stock Exchange Authority and it keeps falling.
Banco Popolare was halted and unhalted and is now down 6%.

Spread on Italian Bonds reached historical highs to 245 with 10 years bonds up to 5.36%, a doom and gloom threshold was set only few weeks ago to 5% by most analysts.

Italian Stock Exchange closed down almost 3.5%

On the political side the situation inside the Italian Government is melting down faster than Unicredit stocks.

Tremonti the Finance minister is having an hard time passing an austerity package with an almost open riot inside the government who is unwilling to support cuts given the recent defeat in local elections and the crumbling popularity of Berlusconi. Tremonti has threatened to resign if the austerity package is not passed and Berlusconi signalled before today that he would gladly accept his resignations.

And if it was not enough Mr. Tremonti is now involved in a fraud and bribery investigation where a former aide Marco Milanese has been arrested and it has come out that the Roman residence of Tremonti (rental price 8000 euros per month) was paid by his former aide directly, the situation is evolving fast and Mr. Tremonti was interrogated today by judges in relation to this and other undisclosed issues.

One more among countless investigations and trials that are involving almost every member of the Government.

The only good news was Mr. Berlusconi interview yesterday where he expressed his intention to leave his party and not to run in the next election in 2013 but even that was promptly put in doubt.

The Government has avoided this time to go again with the usual "we fare better than the majority of Europe" and "everything is under control" propaganda to avoid adding insult to a dangerous crisis.

Mr. Berlusconi has assured that an austerity package will be passed before summer to calm down the markets, quite laughable considering his recent fights with Tremonti while pushing for tax breaks and loosened spending budgets.

Tension inside the Italian government is running viral with insults, fights, trials, arrests and corruption spreading and involving almost everyone.

Italian news are reporting arrests of local and national political and business figures every day now, with levels of corruption and bribery reaching new historical highs surpassing even levels seen in the late 80s during Tangentopoli (Bribesville was the chain reaction of arrests that put an end to the so called First Republic and brought Berlusconi on the political stage).
In the meanwhile the recession is biting hard with families' spending power collapsing, prices surging and unemployment and under-employment reaching scary levels especially among young people.
The recent economical turmoil on the bond and stock markets is clearly signalling a dangerous situation in Italy which is getting closer to Spain while in some cases has already overtaken it.
If markets will not receive a strong signal from the Italian government soon we could have chaos even before August.

Italian banks under pressure

Morgan Stanley is reporting an explanation on why recently Italian banks seem to be at the center of the interest of speculators. Italian banks are accounting for the three most active positions in Goldman's Dark Pool. For the second day in a row, the most actives continue to be UniCredit and Banca Monte dei Paschi di Siena (Intesa has fallen from 3rd to 12):

There are some speculations in the local papers that the disagreement between PM Berlusconi and Finance Minister Tremonti has reached a new peak again and that Tremonti may threaten to resign again and this time Berlusconi may be prepared to accept.

Given Mr Tremonti stronger reputation (and Berlusconi's weaker stance esp in the international community), if confirmed this is clearly not helpful for Italy especially at this very sensitive moment

The same papers also indicate that Bini Smaghi (who has to resign from his post as ECB board member given Draghi's appointment) could be appointed should Tremonti go (and he would be a well respected high level appoiontment)

None of this is confirmed and it is not obvious even whether Tremonti would resign, but the uncertainty in itself at a very difficult moment for the sovereign (and the already not very stable political situation in Italy) is not helpful for the market in my view. This comes after Moodys changed outlook for Italy to negative last week

We have seen macro funds (esp credit but also equity) effectively selling Italy since Friday (both on stand-lone concerns for the sovereign) but also as a way to position more negatively on Southern Europe

Italian banks have been significantly impacted recently and some show cheap values (ISP for example which is fully recap'd to 10% CT1 but trades below 0.8x NAV), but I would just be reluctant to get involved as yet as the situation unfolds in Italy but also in Southern Europe, as this is still very fluid. And I think the way bank stocks traded today (with Italians in the red in a green screen) tells me that investors are cautious too.