If Germany is the keystone of the Euro, Italy is now its linchpin. With 10-yr yields hovering near all-time highs, Germany is demanding more austerity and reforms from Italy before they can be guaranteed by the EFSF, and probably even to continue under the ECB's SMP program. As noted by Mario Draghi, rising borrowing costs are threatening to eat up a chunk of the €54 billion in austerity measures already approved by parliament. But things are not looking good out of Italy: Berlusconi, douchebag that he is, is pointing fingers back at Germany, rather than manning up and doing what needs to be done. Worse, the half-assed plan he plans to submit tomorrow falls short of German demands, as that is all he can muster up without his coalition breaking and new elections being called. If his government falls, all bets are off - rising yields do not mix well with new debt issuance, and the uncertainty created by the absence of a government for at least several months has a good chance of being Italy's, and Europe's, coup de grace.
Tuesday, October 25, 2011
Scusi, badaba boopi?
If Germany is the keystone of the Euro, Italy is now its linchpin. With 10-yr yields hovering near all-time highs, Germany is demanding more austerity and reforms from Italy before they can be guaranteed by the EFSF, and probably even to continue under the ECB's SMP program. As noted by Mario Draghi, rising borrowing costs are threatening to eat up a chunk of the €54 billion in austerity measures already approved by parliament. But things are not looking good out of Italy: Berlusconi, douchebag that he is, is pointing fingers back at Germany, rather than manning up and doing what needs to be done. Worse, the half-assed plan he plans to submit tomorrow falls short of German demands, as that is all he can muster up without his coalition breaking and new elections being called. If his government falls, all bets are off - rising yields do not mix well with new debt issuance, and the uncertainty created by the absence of a government for at least several months has a good chance of being Italy's, and Europe's, coup de grace.
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After the plan to create moral hazard was agreed to, French-German spreads have narrowed, Spanish 10-yr bond yields have fallen, the euro has surged as have equities.
ReplyDeleteThere are two holdouts, though: 2 yr euro swap spreads, which have slightly lowered but are still elevated; Italian 10-yr bond yields are marginally lower but like swap-spreads, have not shown the same enthusiasm for the "plan" that eur/usd has.
So Euro banks are only going to raise capital by retaining earnings and selling assets? I bet that means lending will contract...now I wonder what that's going to do to the euro-zone economy?
ReplyDeletehttp://online.wsj.com/article/BT-CO-20111027-719287.html