Greece, Italy and the Euro

Nikitin

Well, I did back up my hunch in the OP.

You guys saw the market panic today? damn, a shame though a bit interesting. People are actually afraid that Italy & Greece will go for the worse due to some political instability which most likely will be over soon (the politicians know the seriousness of the situation).

The main problem though, is that people stop buying Italian government bonds. Since most of these bonds take 5-10 years to mature, Italy is bound to get in bigger trouble than Berlusconi the mafiaso finally being booted + some economic insecurity (which has lasted for years, anyway), thus the fear is irrational. Or my guessing is rubbish.

mheslep

The chart link updates in real time.
Now 7.25 (November 9)
Going, going, going, ...


By contrast Ireland implemented an austerity program, some real spending cuts. The Irish 10 Year bond:

MarcoD

Well, seems you were right on the weather bell. Italy's government bonds now passed the 7% interest magic limit. Most financial experts believe that the 7% interest limit signals the point where a government is bankrupt; i.e., there's no manner in which a government can pay back the debt.

Probably, the next couple of weeks -if interest stays at 7% or above- we'll see Italy apply for EU/IMF support (i.e., cheaper financing).

Nikitin

What about the Italian government debt credit default swaps? These would be the true indicator of the marked betting against Italy.

Anyway I'm no economist but I think you are worrying too much. I mean when was the last time a collapse was predicted by most media outlets in the world at the same time? And the Italian economy isn't that indebted, http://en.wikipedia.org/wiki/Net_int...tment_position . One might guess that the Spanish economy with its heavy trade deficit, huge unemployment and debt would buckle before Italy.

Borg

You might want to read this:

Italy's Crisis: Why You Should Worry

Today's selloff was mainly due to Italian Bond Yields going over the 7% mark combined with the massive amount of debt that they have. If Italy doesn't get its house in order, today's drop could look like a picnic. And, don't forget the US supercommittee has a huge deadline later this month. This summer's budget fights don't bode well for that either. There isn't a lot of good news out there.

Nikitin

Budget fights, fear mongering, fighting over power.. I don't see this is a big problem, politicians aren't dumb (most of them) and they will resolve this.

I am of course nervous about investors running away from Italian bonds (no rational reason to run away from Italy but to stay with Spain or Portugal, though) and thus increasing the yield, but what about US manufacturing companies posting generally good numbers from Q3+ increasing employment in the US economy? Inflation in China is decreasing as well, so maybe the Chinese government will start pumping money into the economy again?

Correct me, but all in all I think there's disproportionally much doom and gloom in the markets.

MarcoD

I don't know, really, I am not a financial expert. But it seems to me that CDSs, which are 'bets' in the hands of others than the government, are indifferent to Italy's government debt position. The market is weird, the CDSs predicted a 100% certain Greek collapse which didn't happen yet. I am pretty certain the CDS rates, whatever they are at the moment, are not a good predictor since I imagine most people will expect Europe to take over the debt; i.e., the debt is mostly guaranteed, but the Italian government will not be able to borrow from the financial markets itself but will need to go through the IMF/EFSF. At worst, they are a market predictor of the whole of Europe going bankrupt.

Again, I don't know. I don't think in this case the international debt figures -which I don't understand,- are that relevant. The 7% interest limit is seen as a hard limit on government debt, I doubt it matters whether the liabilities are international or national.

My best guess is that if the financial experts believe that the 7% is unsustainable, then either Italy implements a number of austerity measures fast -which is what they are doing now, while also kicking Berlusconi out- and hopefully get the interest number below that before a substantial part of the debt needs to be rolled over, or the rest of Europe will need to bail out Italy. The latter, of course, is an informal but not a technical bankruptcy.

At the moment, in Italy, the government is asking wealthy Italians to buy the debt???

Again, these are all the best guesses of a financial nitwit. Best I can do is repeat what the real experts think, which I didn't do in the above speculations.

(Italy is different than Greece. The Italians are rich, the economy is strong, though their government may be broke. I don't think there is a need for a hair-cut like in Greece, they just need to reform government, and probably raise taxes to get out of the current debt hole... and maybe apply to the EFSF/IMF meanwhile.)

SW VandeCarr

OK. In 1929 there were no wars, shortages, plagues, or even a lot pessimism before October. Why did stock markets and eventually the world economy collapse? Today the interest rate demanded by the market for Italian government 10 year bonds hit 7%. For Italy, that rate is unsustainable. What would make that rate go down? What would make that rate go even higher? It's a gamble that has little to do with business activity and that's the mistake that you and many financial advisers are prone to. Markets are affected by many things, and it's quite obvious that a major default in the Euro zone will have severe ramifications. You can be cautious or you can be daring. But to say there is too much gloom and doom and that we can rely on politicians to do the right thing is bologna!

klimatos

Because if Greece defaults a very large number of very influential Americans will loose very large sums of money. This bailout is part of the ongoing process to make investment profits private and investment losses public.

rootX

Can't they take over all Greece assets (government land properties/historical sites)?

I was thinking the most ideal way out of this is let Greece default and get ownership of all its assets to pay back the investors.

It angers me when I see how others are punished for irresponsible Greeks behavior.

AlephZero

It's not a "hard" limit, it's just a measure of the risk investors are prepared to take in the current low-interest-rate low-inflation environment.

There's another factor. The clearing house for settling bond trades (LCH Clearnet) has raised its margin deposits on Italian bond trades by about 75%in the last few days. That instantly makes trading them much less attractive compared with the alternatives.

We are talking big numbers here - more than 350 bn Euros in 2012 just to "recycle" the short term debt that will come due for repayment. I dunno if the Vatican and the Mafia can afford that sort of money

Nobody knows what the worst case scenario would be, but 2000 bn Euros is one credible estimate.

Not only broke, but completely broken. An analogous scenario in the US would be something like this: imagine Rupert Murdoch had bought up several more media channels (including public service broadcasting) and had more or less 100% control over the national news media; he then became President while keeping full personal control of his media empire; he then stayed in office for 16 years; oh, and he also changed the law so that he was untouchable by the legal system on any grounds whatever...

MarcoD

I think the British did that once when Greece defaulted. They seized lots of Greece's cultural heritage. In the end, they gave it all back.

What are you going to seize? You can ask for an island, then what? You own an island with twenty thousand grumpy Greeks on it? What are you gonna do? Tax them?

Again, Greece is not a problem. It is 2% of the EU. If Germany wanted, it could probably buy Greece's debt by itself. Nobody cares. It ain't nice for Greece's public what's happening, I sympathise, but they are nothing in comparison to Italy. Italy is the third economy of the EU with a debt larger than most of the other PIIGS combined.

It may be that interests rise since investors are worried the EU will inflate their way out of (Italian) debt. No idea.

AlephZero

You have the "being in debt" problem the wrong way round. It's the old joke: if you owe your bank $10,000 and you can't pay, you have a problem. If you owe the bank $10bn and you can't pay, the bank has a problem.

But I guess once the US has lost interest in screwing up Iraq and Afghanistan, it could try invading Greece as its next adventure. Just so long as you don't try to claim the British Museum in London is also US territory because the Elgin Marbles are there.

MarcoD

I looked that up. Seems I got my history screwed up. I thought I remembered British seizing Greek assets, but looks like I was mistaken.

klimatos

Unfortunately, this is not possible. These assets were not pledged as collateral for the loans. They cannot be legally seized upon default. Greek bonds, like US bonds, are back by the "good faith and credit" of the nation. The credit disappeared a long time ago, and the good faith followed soon after.

My complaint is with the whining of the investors. For years they received high yields to compensate them for high risks. Well, . . . they lost. They should either take their lumps like men or give all those yields back with interest.

mheslep

Perhaps, but how do you know this? For all I know Greek bonds are held by the Wisconsin teachers union pension fund, and they, or those like them, are exerting political influence on the IMF level pullers.

Nikitin

The Italian 10 year loan rents hit 7% yield due to irrational fear, and I'm certainly no financial expert.

The only thing I fear at this moment is the yield due to this evil circle: the higher the yield the more fear and the more fear the higher the yield. Will the rents go down? I think if people get greedy enough and start buying, it will.


As for the great depression, as far as I know it happened due to loaning and speculation on the stock market. It's an interesting pattern that pretty much every stock market crash happens after a rosy bull-market period.