Is there realistically any chance Italy will avoid a bailout?

[Chris]

First it was Greece. Bonds started increasing to uncomfortable levels triggering increasing concern about the state of its finances. Panic started setting in, and EU leaders scrambled to "reassure" the markets that there was nothing to be seen here, that everything was fine, and it was all down to evil speculators. In early 2010 Greece managed to sell some bonds at a yield of just over 6%. Shortly after the whole house of cards came tumbling down, showing that speculators were 100% correct, ultimately leading to the bailout.

Next in line was Ireland. Again bonds started increasing to uncomfortable levels triggering increasing concern about the ability of the state to borrow in the future because of a combination of a massive deficit and bank bailout costs. Just like Greece, Ireland managed to sell some more bonds on the open market, and just like with Greece it was claimed a success and that there was no need for all the panic. Again evil speculators got blamed by EU leaders, but again they were 100% correct. Irish leaders came out in droves to claim there would be no bailout, and we all know how right they were. Very shortly after the "successful" bond auction with a yield of over 6%, Ireland too was bailed out.

Third in line was Portugal. The very same thing happened again, i.e. total denial and that there was nothing worth seeing, evil speculators were singling out Portugal. Their problems were completely different, we were told, and again commentators pointed at a bond auction they managed to pull off, as a sign of success. Yet again another country was bailed out shortly after that auction.

On Monday news came out that Italy's bonds were under attack on the markets, and that bond yields were uncomfortably high. Again EU leaders scrambled to cover up the whole mess, and again there was a "successful" bond auction of 12 month bonds. Media and politicians came out in droves to reassure the public that the bond sale showed that there was no problem with Italy. And again, politicians tried to blame speculators, in this case Italy scrambled to ban short selling.

Anybody else get a sense of déjà vu? The next few weeks/months will tell whether the Italian story pans out the same as the other 3, but I'm betting it will.

 

[Firefly]

Hi Chris,

Looks worrying alright. I wonder if a few "influential" speculators began betting against a country would everyone else pile in resulting in the yields rising? The reason I'm asking is why (Ireland's debt is a bit different as it has balloned due to bailing out the banks) have all these European countries with longtime large deficits only now seeing such pressure on their bond rates?

Firely.

 

[44brendan]

There are currently high concerns in respect of the financing needs of both Italy & Spain. In terms of risk Spain would seem to be more vulnerable than Italy as its banks are highly exposed (450B) to a declining property market with a current loss provision in the order of 10%.
The word on Italian banks is that they have been predominately conservative in their lending practises and would not be regarded as vulnerable. However both country's bonds are now coming under attack in the market and EU support will be needed to preserve the risk of further decline and ultimate need for external support.
In terms of overall funding requirements any one of these countries would see the crisis in Greece/Portugal/Ireland pale into insignificance by comparision given the support funding that would be required. A collapse of either would be cathrostophic for the EU and would certaintly lead to further contagion and an ultimate end game for the Euro. I can't see France/Germany allowing this to happen and would expect a far higher level of respose/urgency than that applied to the PIGS countries. Issue of single Euro Bonds are a possibility but there will be attempts to contain the markets and maintain some level of stability. Whether these work or not is another question.

 

[Chris]

Looks worrying alright. I wonder if a few "influential" speculators began betting against a country would everyone else pile in resulting in the yields rising? The reason I'm asking is why (Ireland's debt is a bit different as it has balloned due to bailing out the banks) have all these European countries with longtime large deficits only now seeing such pressure on their bond rates?

I think the influence of speculators in general is grossly overstated. What you have to keep in mind is that for every speculator shorting a bond (and driving up the yield) there is someone buying it. What speculators do is increase liquidity which results in much faster reflection of current conditions in the price.
If all it took to make money was to throw loads of money into shorting a certain position, then many small companies would simply not exist. Imagine a company whose market capitalisation is €20m. By the assumption that speculators can seriously influence the price, you would have to imagine that they would go after all these small companies shorting the hell out of them all the way to zero, making a ton of easy money. But that doesn't happen, because speculators do not have the influence to change prices that many would have us believe.

A collapse of either would be cathrostophic for the EU and would certaintly lead to further contagion and an ultimate end game for the Euro. I can't see France/Germany allowing this to happen and would expect a far higher level of respose/urgency than that applied to the PIGS countries. Issue of single Euro Bonds are a possibility but there will be attempts to contain the markets and maintain some level of stability. Whether these work or not is another question.

I always find the word contagion misplaced in this sense. What this indicates is that like a disease the financial crisis spreads from one country to another. A much more accurate analogy would be to say that the market has found a new way to diagnose an existing disease, and with this new ability it is now possible to identify the disease in more places. The ability to diagnose has done nothing to spread the disease, it simply identifies it where it already exists.
The Euro Bond has been touted for a while now, but there is zero appetite for such a bond in countries like Germany, Holland and Finland, so I can't see this realistically happening. I believe the question will not be whether Germany/France will allow the Euro to fail, but rather whether they will be able to do anything to stop it from failing. The reason it is failing at the moment is because of the aversion to letting countries default. If countries were to default it would have a hugely positive affect on the value of the Euro in the long term.

 

[Jim2007]

Anybody else get a sense of déjà vu? The next few weeks/months will tell whether the Italian story pans out the same as the other 3, but I'm betting it will.

The Euro bond is getting closer... it is just a question of how much pain German and France is will to take before the accept it, me thinks.

Jim.

 

[ringledman]

The Euro bond is getting closer... it is just a question of how much pain German and France is will to take before the accept it, me thinks.

Jim.

And how much sovereignty the PIIGS will give in return in the new federal state.

 

[dockingtrade]

ARe we getting close to burning bond holders and or printing euros ...... maybe what should have happened on day one

 

[Chris]

The latest on Italian bonds is that the 10 year yield is at 7.38%, the 5 year yield is at 7.62% and the 2 year is at 7.14%.
The only thing that surprises me is that it took 4 months to get to this stage. Are the Eurocrats ever going to learn that this mess is beyond their control? That countries spent too much money and it is coming home to bite them in the "culo"? Hopefully Europe will come to the conclusion that Iceland came to, and realise that €1.6tr of Italian debt is too much to bail out, but I'm not holding my breath.

 

[DerKaiser]

The only thing that surprises me is that it took 4 months to get to this stage.

Are the Eurocrats ever going to learn that this mess is beyond their control? That countries spent too much money and it is coming home to bite them in the "culo"?

Hopefully Europe will come to the conclusion that Iceland came to, and realise that €1.6tr of Italian debt is too much to bail out, but I'm not holding my breath.

100% agree.

The markets are not blameless in all of this though.

I'm sure you would have had the same thought process as me 6 months ago. The question being why do the markets turn on countries in sequence over a protracted period of time during which the fundamentals have not changed.

We have known that Italy has had an enormous debt to GDP ratio for some time, why only react to that now?

 

[Purple]

We have known that Italy has had an enormous debt to GDP ratio for some time, why only react to that now?

"Sentiment"

 

[RMCF]

Greece, Portugal and Ireland were all manageable.

But I think we are watching the beginning of the end of the Euro.

And why do I get the feeling there might be some conspiracy at work here? There are a lot of people making a lot of money out of all this pain.

 

[Chris]

"Sentiment"

That and a certain amount of myopia sure have an impact. But the real reason is the gradual realisation that certain levels of debt are just too big for politicians to fix with a wave of the hand. There is still widespread belief that politicians can ultimately bail everyone out and that then everything will be fine again. If bondholders and speculators actually operated in a non-socialised market then we would see a much more rapid cleansing of the debt markets, but unfortunately governments around the world are doing everything they can to create a back stop instead.

 

[Purple]

If bondholders and speculators actually operated in a non-socialised market then we would see a much more rapid cleansing of the debt markets, but unfortunately governments around the world are doing everything they can to create a back stop instead.

A King Knut type image of governments building walls of sand to hold back the tide always springs to mind for me when I hear about governments “fixing” these type of problems.

 

[bryanod]

The Euro bond is getting closer... it is just a question of how much pain German and France is will to take before the accept it, me thinks.

Jim.

Yep, Germany even mentioned Eurobonds today if they get more Fiscal union they will have joint-liability.

Until then we'll probably get an eventual catch up to the Fed/BoE and turn on the printing presses, Draghi already shown he's happier to ease than Trichet's stubborness.

"Sentiment"

Yep again. About half of it is domestically held in Italy, they do have a working economy (unlike Greece basically) so shouldn't really be here, and ECB already in bringing yields back to 7% today. And they issued 1 year money at 6% today also.