Thread: Forget 3 Months: Italy May Have 2 Weeks Tops, As "It Already Is Where Spain Is Headin

Forget Three Months: Italy May Have Two Weeks Tops, As "It Already Is Where Spain Is Heading"



Submitted by Tyler Durden on 06/13/2012 08:05 -0400

Yesterday, Austrian finance minister Maria Fekter ruffled the unelected Italian PM's feather by saying "forget Spain, Italy is next in the bailout line" - a statement which as expected was promptly loudly refuted, mocked, and scorned by everyone possible: the type of reaction that only the truth can possibly generate in Europe. So far so good: after all the typical European reaction to any instance of the truth is loud screams of "lies, lies" and promptly sticking your head deep in the sand. However, this time around Italy may not have the benefit of the doubt, nor the benefit of some sacrificial replacement of a prime minister: Silvio is long gone, and at this point switching one banker figurehead with another will do precisely nothing. Which is why this morning's assessment from Bloomberg economist David Powell is spot on: "Italy would probably be forced into receiving a bailout if it were to face another two weeks like the last seven days." But the punchline: "The bad news for Italy is the country’s stock of debt is already as large as Spain’s may become after years of fiscal turmoil. In other words, Italy already is where Spain may be heading."

Surely Powell must be joking: has he not heard that Spain is not Uganda, and that there is "no risk" Spanish contagion will shift to Italy? Apparently not: which is actually what happens when one does the math and relies on facts instead of bluster, rhetoric and propaganda.


From Powell:

The seven-year sovereign yield has increased to 589 basis points from 538 basis points a week ago. That figure can be used as a proxy for the level with which the average cost of debt will eventually converge, as long as the current maturity profile is maintained, because the average age of the nation’s bonds is seven years.


The country would violate the IMF’s definition of solvency if its average cost of debt were to surpass 680 basis points. The fund defines debt as sustainable if the debt-to-GDP ratio starts to decline before the end of the forecast horizon. A rise to that level would push the ratio up to about 131 percent in 2016 and marginally higher the following year, according to Bloomberg Brief estimates. Those calculations use the projections of the IMF for growth, inflation and the primary budget deficit. If the average cost of debt were to remain at 5.89 percent - the present level of the seven-year yield - the debt-to-GDP ratio would peak in 2014 at126 percent. It would then decline to 124 percent by 2017.

The picture would deteriorate if the IMF’s economic growth forecast for this year were to prove too optimistic. It has estimated a contraction of 1.9 percent.

That looks like a best-case scenario. Output already declined 0.8 percent quarter over quarter during the first three months of the year.

The PMI data suggests the second quarter will be worse. The readings for the manufacturing sector were lower in April and May than they were at the start of the year. The figures for January, February and March came in at 46.8, 47.8 and 47.9, respectively. They were 43.8 and 44.8 for the following two months.

It gets worse...

The debt-to-GDP ratio already violates the proxy of national solvency derived from the research of Carmen Reinhart and Kenneth Rogoff. They have found sovereign debt becomes detrimental to economic growth, on average, when the ratio surpasses 90 percent.


The good news for Italy is the country has avoided a real estate bubble capable of bringing down the domestic banking system and the government has already closed the primary budget deficit. The major problem for Spain has been a recapitalization of the nation’s lenders and several years of persistent budget deficits may push the country’s debt-to-GDP ratio toward the territory of insolvency.

...And much worse.

The bad news for Italy is the country’s stock of debt is already as large as Spain’s may become after years of fiscal turmoil. In other words, Italy already is where Spain may be heading.

A sharp rise of funding costs is capable of making the size of the liabilities of Italy start to look relatively as large as those of Greece.

And so the temporal bogey is set at +/- 14 days, as the bond market sets its sights on the exits in preempting the Nash equilibrium defection out of Italy.
Now, we look forward to blaring denials out of Italy that all of the math above is simply idiotic and that we should trust them, because all is fine. Also: Italy is not Somalia.

Forget Three Months: Italy May Have Two Weeks Tops, As "It Already Is Where Spain Is Heading" | ZeroHedge

More Gruel, More Gruel



Submitted by Tyler Durden on 06/13/2012 07:55 -0400
From Mark Grant, author of Out of the Box

Pathos
It is really rather pathetic. The Prime Minister of Spain today called for a deposit guarantee fund, pleaded for the EU to take over the budget of Spain and said Spain would cede its sovereignty over its banks. This is all just one thing; a cry for money and money at any cost. The poor fellow has obviously lost whatever self-respect that he had and is behaving no differently than some street urchin begging for alms. What can be seen from this kind of behavior is the desperate state that Spain is in and it is reflected in his desperate pleas for help. I would speculate that so much has been hidden and so many balance sheets falsified that Spain has suddenly found itself in a sea of their own making which could be termed, “Dire Straits.” When Rajoy termed the bailout for Spain as a “Victory for Europe” I knew that he had left “sense and sensibility” behind and headed into the land of Don Quixote where windmills were imagined to be giants and fantasy had replaced reality. The problem is, unlike the creation of Miguel Cervantes, this guy is the Prime Minister of Spain and not some aged senior chasing after the Knights Templar in his later years.

More Gruel Please Sir

I am reminded of that famous scene in Oliver where a second serving is asked for and the commotion that it causes. The European Union can now be viewed as three distinct groups. The bailed-out countries that are trying to renegotiate their agreements, pleading for more money, and asking for more integration in the hopes of getting more gruel. This is all characterized by some grand plan of course so that they can con the wealthier nations out of their money under the banner of the Three Musketeers, “All for one and one for all” which really just means; “give me your money so I can live just like you do and thank you so much.” Then the second group is the Brussels Sprouts which want to take over power from all of the national governments and run Europe out of Belgium and wave flags, have parades and dine on Beluga caviar accompanied by splits of champagne. They believe their own rhetoric and think that Europe is going to be some commonality where the people in Berlin and the people in Lisbon have the exact same standard of living and I think there will be a revolution in Germany before that is allowed to happen. Then the final category is Germany, the Netherlands, Finland and Austria which everyone else wants to pay for this enterprise as Germany passes out just enough to maintain control and makes certain well defined noises to keep everyone begging for more while they refuse to partake in any of the nonsense bandied about by the poorer nations as they are not going to destroy their own economy for the sake of some grand scheme that would raise their cost of funding to an average of Europe while lowering their standard of living to a mean of Madrid and Athens; it is just not going to happen and no delusions should be maintained.

It is not that hard to figure out, this dis-jointed Europe, just watch what the Germans actually do and don’t pay too much attention to what they say; that is the trick of it. The whole thing is a double con game but the people with the money, as in the rest of life, are who is in control and not the beggars with outstretched hands hanging about on the corner. Spain has fallen, Italy is under siege and France wants to join the have-nots in the hope that Germany will pay for all of the promises made by Hollande to the French people during their election. As Italy falters France may be the next nation to come under closer inspection especially if Hollande proceeds to implement more government spending and the lowering of the retirement age along with his other Socialist programs. Again I remind you to pay little attention to the rhetoric but watch what Germany does and that will set the program for the future. They can vote all they want in Brussels and draw up all kinds of grand plans they desire but if Germany does not want to accept them then it is little more than semi-polite conversation over well-dressed cucumber sandwiches in various capital of Europe.

June 17

This is the day of the elections in Greece as Democracy rears its ungainly head. One way or another; the outcome is likely to be unsettling. If the leftist party wins then a game of chicken will ensue with Germany doing a down and dirty calculation on how much it will cost them and offering just that much and no more. Then the young leader of the new Greek government will probably overplay his hand and Germany will turn off the monetary spigot. This will then lead to a second game of chicken where Germany tries to get Greece to leave as Greece dares them to throw them out. The rhetoric will get quite testy and we will all watch to see who blinks first. Greece will regain the spotlight but the cost of the performance will be high. There is $1.3 trillion riding on this bet which is the total amount of Greece’s unpaid bills and a default will cause havoc past what I think the Germans will calculate. Europe seems to believe its own jargon these days and I fully expect any EU offers to miss the mark by a wide margin and then the demons will leap from the Trojan horse.

More Gruel, More Gruel | ZeroHedge