German Economy Contracts, France Stagnates, Italy in Recession; Time for a Rethink
Round two? or is it three?
German Economy Contracts, France Stagnates, Italy in Recession; Time for a Rethink
ECB planning one trillion euros of stimulous. Some comments here:
One high-ranking EU official compared the situation to a patient who has survived intensive care but wants to leave the hospital early. A relapse is certain and the subsequent care will be much more involved than if the patient had stayed in the hospital long enough for full recovery. Greece's second bailout package officially ends in a month's time, but it is already certain that the country will require additional funding from its EU partners.
AEP said:The political centre across southern Europe is disintegrating. ...
As matters stand, Podemos is on track to win the Spanish elections in November on a platform calling for the cancellation of "unjust debt", a reversal of labour reforms, public control over energy, the banks, and the commanding heights of the economy, and withdrawal from Nato.
The revolt in Italy has different contours but is just as dangerous for Brussels. Italians may not wish to leave the euro but political consent for the project but broken down. All three opposition parties are now anti-euro in one way or another. Beppe Grillo's Five Star movement - with 108 seats in parliament - is openly calling for a return to the lira.
Mr Grillo proclaims that Syriza is carrying the torch for all the long-suffering peoples of southern Europe, as it is in a sense.
"What’s happening to Greece today, will be happening to Italy tomorrow. Sooner or later, default is coming," he said.
Currency guru Barry Eichengreen - the world's leading expert on the collapse of the Gold Standard in 1931 - thinks Grexit might be impossible to control. "It would be Lehman Brothers squared,” he said.
This is not the view in Germany, at least not yet. The IW and ZEW institutes both argue that Europe can safely withstand contagion now that it has a rescue machinery and banking union in place. It must not give in to "blackmail".
The fond hope is that the European Central Bank can and will smooth over any turbulence in Portugal, Italy and Spain by mopping up their bonds, now that quantitative easing is on the way. Yet the losses suffered from a Greek default would surely ignite a political firestorm in Germany.
Bild Zeitung has devoted two pages to warnings that Grexit would cost Germany €65bn, or much more once the Bundesbank's Target2 payments though the ECB system are included. The unpleasant discovery that Germany's Target2 exposure can in fact go up in smoke - despite long assurances that this could never happen - might make it untenable to continue such support.
It is unfair to pick on Portugal but its public and private debts are 380pc of GDP - the highest in Europe and higher than those of Greece - making is acutely vulnerable to toxic effects of deflation on debt dynamics.
Portugal's net international investment position (NIIP) - the best underlying indicator of solvency - has reached minus 112pc of GDP. Public debt has jumped from 111pc to 125pc of GDP in three years. The fiscal deficit is still 5pc. The country's ranking in global competitiveness is close to that of Greece.
"The situation in Portugal is very different," says Paulo Portas, the deputy premier. Sadly it is not. Once you violate the sanctity of monetary union and reduce EMU to a fixed-exchange system, the illusion that Portugal is out of the woods may not last long. Markets will test it.
The CEO of Monte dei Paschi, Italy's third largest bank, and the oldest surviving bank in the world, admits Customers Pulling Deposits as share prices sink.
... rapid collapse in the banking system is contagiously spreading to peripheral sovereigns once again. Portugal risk spreads are up 120bps in the last 3 weeks and Spain and Italy are soaring over 35 and 50bps respectively ...
Greece, sources told MNI, "seems unable to deliver" on a number of measures Brussels says Athens needs to implement an effective fiscal consolidation plan. "We agreed to disagree," one official said. "Judging from (last week's) talks, the negotiations could drag for months. Anyway, I don't see any real funding needs for Greece until June," the official went on to note.
A new German plan to impose "haircuts" on holders of eurozone sovereign debt risks igniting an unstoppable European bond crisis and could force Italy and Spain to restore their own currencies, a top adviser to the German government has warned.
“It is the fastest way to break up the eurozone,” said Professor Peter Bofinger, one of the five "Wise Men" on the German Council of Economic Advisers.
"A speculative attack could come very fast. If I were a politician in Italy and I was confronted by this sort of insolvency risk I would want to go back to my own currency as fast as possible, because that is the only way to avoid going bankrupt,” he told The Telegraph.
The German Council has called for a “sovereign insolvency mechanism” even though this overturns the financial principles of the post-war order in Europe, deeming such a move necessary to restore the credibility of the "no-bailout" clause in the Maastricht Treaty. Prof Bofinger issued a vehement dissent.
The plan has the backing of the Bundesbank and most recently the German finance minister, Wolfgang Schauble, who usually succeeds in imposing his will in the eurozone. Sensitive talks are under way in key European capitals, causing shudders in Rome, Madrid and Lisbon.
Under the scheme, bondholders would suffer losses in any future sovereign debt crisis before there can be any rescue by the eurozone bail-out fund (ESM). “It is asking for trouble,” said Lorenzo Codogno, former chief economist for the Italian Treasury and now at LC Macro Advisors.
This sovereign "bail-in" matches the contentious "bail-in" rule for bank bondholders, which came into force in January and has contributed to the drastic sell-off in eurozone bank assets this year.
Prof Bofinger wrote a separate opinion warning that the plan could become self-fulfilling all too quickly, setting off a “bond run” as investors dump their holdings to avoid a haircut.
Italy, Portugal and Spain would be powerless to defend themselves since they no longer have their own monetary instruments. “These countries risk being hit by a dangerous confidence crisis,” he said.
David Folkerts-Landau, chief economist at Deutsche Bank, says “Europe is Seriously Ill”, and EU banks need a €150 billion bailout program.
... the entire European banking system is on the verge of collapse, starting with Italy. ...
Europe has seemingly coped well with its recent Brexit shock, but now looms the prospect that Italy might be heading for the Eurozone’s door. This should be of great concern to European and global economic policymakers. While it is possible to think of a Europe without the United Kingdom, it is difficult to conceive that the Euro in anything like its present form could possibly survive the departure of Italy, the Eurozone’s third largest member country. It is also difficult to imagine that the Euro’s unraveling would not be a globally systemic economic event.
The political fallout from years of highly disappointing Italian economic performance is soon to be tested at the polls. At a yet-to-be-specified date in November, Italy is scheduled to hold a referendum on constitutional reform, mainly involving a proposed streamlining of its two-chamber parliament. With Prime Minister Matteo Renzi committed to resigning should he lose the referendum, the opposition has converted this referendum into a vote of no- confidence on the government.
Yet, in the event that Mr. Renzi were to lose the November referendum, political uncertainty is precisely what Italy would get. It is very possible that new parliamentary elections would need to be called. At a minimum a no vote in the referendum would embolden the country’s populist Five Star Party, which is already level with Mr. Renzi’s Democratic Party in the polls and which is committed to taking Italy out of the Euro. ...
"The US election will help all those who have not had the courage to come out and say 'I will vote No'," proclaimed one of Italian PM Renzi's opponents as The FT reports the centre-left prime minister’s referendum on change is threatened by the global populist wave. Even before the US election, he faced a struggle to secure victory in the referendum, with most polls tilting in favor of voting 'No', albeit with many undecided voters, but opponents claim "many undecided voters in the polling booth will say ‘No No No’, just like Trump voters."
That fear is most evident in Italian sovereign bonds which have collapsed dramatically in the last weeks (accelerating in the last few days) with 10Y BTP yields above 2.00% for the first time since July 2015 and the spread to Bunds at its highest in 2 years (despite collossal buying from the ECB)...
And as if more evidence of the growing concerns over Italy's future were needed, Italy's TARGET2 balance just hit a record high (these balances, or rather imbalances, reflect the direction of the capital flight...
And now most recently we see capital flight accelerating as the refendum looms and is increasingly signaling "Italeave" is on the cards.
In a year of confounded expectations, another allegedly unthinkable idea, Eirexit, is gaining traction according to the Irish Times.
The Irish Times noted the rising support for Eirexit from various fringe groups and asked “Are these a collection of disparate and peripheral voices, or do they reflect a population far less enamoured of Brussels than its political leaders?”
It’s safe to say we have an answer already. Look at Brexit. The left was supposed to vote vote overwhelmingly “Remain”, instead, only the big liberal cities did.
Look at the US. Working class people, men and women voted hugely for Trump.
Italy's referendum explained: What you need to know
Italian citizens will vote on constitutional reform on Sunday in what is seen by many analysts as the most significant European political event of 2016. Yes, even bigger than Brexit.
What are Italian citizens voting on?
Constitutional reform. Prime Minister Matteo Renzi is campaigning for a "yes" victory in an effort to make it easier to govern the nation moving forwards.
The reforms would remove power from the Senate and mean that proposed laws would only require the approval of the lower house of parliament, as opposed to the current system which requires approval from both houses.
Renzi has even gambled his political future on the referendum having said he would resign if a "yes" vote is rejected.
A "no" vote, as championed by populist party Five Star Movement (5SM), would block the reforms to streamline Italy's public administration and would mean the extensive checks currently required stay in place.
Francesco Oggiano, the author of "Beppo Grillo Parlante", told CNBC on November 14 that he believed 5SM's opposition to the proposed reforms boils down to a new electoral system perceived to be attached to the reforms.
"According to the 5SM, people won't be able to choose their own representatives in the parliament and this is the most important point," Oggiano explained.
"The result (of a 'yes' victory) would be a parliament full of bureaucrats chosen from their parties that, once elected, will just get to satisfy their leader instead of people's needs," he added.
Will the reforms be accepted or rejected?
The latest opinion polls, published before a two-week blackout phase of polling in Italy, indicated a 53.5 percent to 46.5 percent in favor of the "no" camp.
Holger Schmieding, chief economist at Berenberg Bank, said in a note on Tuesday he believed the likelihood is that Italy's citizens would reject the reforms.
"Some whispers suggest that more than half of the up to 20 percent of undecided voters may back Renzi in the end," Schmieding said.
"Also, many of the rebellious young people who oppose Renzi may not bother to vote. Whereas the outcome is thus no foregone conclusion, I put the probability of a 'no' vote at 60 percent," he added.
The likeliest path is that Italy gets a caretaker government, with finance minister Pier Carlo Padoan considered a front-runner to serve the rest of the term. The next general election is due in 2018, but Renzi’s opponents, which include the center-right, populist far-right, hard left, and other anti-establishment parties, may try to force a snap election in the hopes of gaining power. The sooner the election, the more uncertainty and instability it will entail for Europe’s fourth-largest economy.
Italy is no stranger to political turmoil, of course—it has had 63 governments since the founding of the republic after World War II. Even so, a renewed bout of instability is unwelcome. The Five Star Movement, an upstart populist party that wants to hold a referendum on Italy’s membership of the euro zone (but not the EU itself), is neck and neck with Renzi’s Democrats as the party likely to garner the most votes in the next election.
Complicating matters is a push to reform the country’s electoral laws, intended to award the most popular party bonus seats to ensure more stable government majorities. The rejection of constitutional reforms puts these electoral changes in doubt—perversely, that probably hurts the chances of the populists celebrating Renzi’s defeat gaining power, according to analysts at Manulife.
This makes it far too simplistic to say that what happened in Italy is akin to the Brexit vote in the UK or Donald Trump’s victory in the US. In Rome, the populists agitated for voters to stick with the status quo, and the result could make it harder for them to seize power down the line. The target of their ire was 41-year-old Renzi, Italy’s youngest-ever prime minister, who they painted as part of an ossified, ineffectual establishment. There are many steps that would need to happen before anything like Brexit—or “Quitaly,” if you will—is a remote possibility in Italy.
What’s clear, however, is that a founding member of the EU and euro zone has been shaken, and the reverberations are unlikely to break it out of its economic stupor.
Well, now that the Italians and Austrians have had their day, the European political landscape is pretty much set heading into 2017, which is going to be a YUUUUGGEE year with all kinds of land-mines for the EU.
Here are the dates for the important ones:
General Election: March 15, 2017
-First round: April 23, 2017
-Run-Off (assuming no majority in Round 1) - May 7, 2017
Federal Parliament: June 11 and 18, 2017
Federal Elections: Sometime between August 22 and October 22, 2017
And of course, the Italians will likely have their new elections during this period, as well. Some European news outlets are now saying they may go as early as March.
I hope that is true. Imagine Geert Wilders being sworn in as the new PM making his case for Nexit to the orderly Dutch people, while at the same time Beppe, Silvio Berlusconi and some separatists from Northern Italy all hurl shit at at one another while also hurling shit at the Superstate up in Brussels and the bankers in Germany. Holy shit, I don't know if I could handle it.
EU set for ANOTHER hammerblow: Geert Wilders’ Freedom Party soars ahead in polls
DUTCH right-wing Freedom Party has soared ahead to lead the polls ahead of the parliamentary elections.
The party, led by the controversial Geert Wilders, would beat prime minister Mark Rutte’s ruling conservative liberals if elections were held today.
The Freedom Party (PVV) can count on 29 seats out of the 150-seat chamber, according to the latest IPSOS poll, making it the largest party in the Netherlands.
In the space of one month the popularity of the PVV has surged with an increase of six seats.
The data suggests Eurosceptic Mr Wilders could become the Netherlands’ next prime minister, potentially spelling the end of Dutch membership of the EU.
Alan Greenspan, the former head of the Federal Reserve has warned that the euro may collapse, saying that he has “grave concerns” about its future.
The imbalances in the economic strength of euro area countries make the continued function of the single currency area a primary concern, said former US Federal Reserve chairman Alan Greenspan in an interview (February issue of “Gold Investor”) with the World Gold Council.
He suggests the inequality is largely down to a north/south geographical divide which means the division between the northern and southern EU countries is too big. The bloc’s more prosperous nations such as Germany consistently fund the deficits of those in the south, and that simply can’t go on, said Greenspan....“The European Central Bank (ECB) has greater problems than the Federal Reserve. The asset side of the ECB’s balance sheet is larger than ever before, having grown steadily since Mario Draghi said he would do whatever it took to preserve the euro,” he said.
“And I have grave concerns about the future of the euro itself… The eurozone is not working”, added Greenspan.
Mr Greenspan said Brexit will almost certainly trigger a collapse of the ECB despite the UK not having adopted the euro:...“Brexit is not the end of the set of problems, which I always thought were going to start with the euro because the euro is a very serious problem.”
As soon as any major country exits the Eurozone (and possibly some lesser ones), a cascade of defaults, unparalleled in history will commence.
The only way to stop such a cascade would be if the ECB guaranteed (printed) enough euros to cover losses. Meanwhile, the already high Eurozone default risk keeps rising.
Finance ministers from the world’s biggest economies have dropped pledges to renounce protectionism in a meeting marked by tension over trade between the US and others including China.
G20 finance ministers meeting in the German resort town of Baden-Baden noted the importance of trade to the global economy but dropped tougher language from last year that vowed to “resist all forms of protectionism”.
The watered-down commitments on free trade reflected the anti-globalisation mood that Donald Trump has brought to Washington and came in the first G20 meetings between Steven Mnuchin, the new US Treasury secretary, and his foreign counterparts.
... conversations are taking place in the Italian parliament regarding the future of Italy in the eurozone.
Via email, Eurointelligence asks Is Italy heading for debt restructuring or euro exit?
...We are reporting from an important conference in Rome yesterday that has caught the Italian news headlines this morning – on the future of Italian public debt. It was organized by the Five Star Movement, held in the Italian chamber of deputies, and openly discussed issues such default mechanism inside the eurozone, sovereign debt restructuring mechanisms, parallel payment systems, and of course euro exit.
What is important about this debate is that it is now taking place in public – you can’t be more public than inside the parliament. Italians, not only the Five Star Movement, are openly talking about these issues.
Earlier on Monday, a senior 5-Star official said forming a coalition without it would be impossible after it soared to become Italy’s largest single party by far, heading for around 32 percent.
The League’s economics chief on Monday raised the prospect of a ruling alliance with 5-Star, which would likely be euro-sceptic and be little interested in further European integration.
The biggest loser in the election was the Democratic Party that has ruled since 2013. Its leader, former prime minister Matteo Renzi, has decided to resign, Italian news agency Ansa said on Monday.
A Renzi spokesman said he knew nothing about such a decision and that Renzi would speak publicly at 5 p.m. (1600 GMT).
Despite overseeing a modest economic recovery, the ruling centre-left coalition trailed a distant third on 22 percent, hit by widespread anger over persistent poverty, high unemployment and an influx of more than 600,000 migrants over the past four years.
Swift new elections to try to break the deadlock are another plausible scenario.
Prolonged political stalemate could make heavily indebted Italy the focus of market concern in Europe, now that the threat of German instability has receded after the revival on Sunday of a grand coalition under Chancellor Angela Merkel.
In early European trading, the euro dipped while investors dumped Italian government debt, with the yield on its 10-year bonds IT10YT=TWEB jumping 10 basis points.
Under political pressure, the ECB ponders dumping rules on tackling close to $1 trillion in nonperforming loans.
The Eurozone banking system is insolvent, but no one wants to admit that, at least officially.
Instead, the ECB has rules in place that would force banks to deal with bad loans. That too may go by the wayside.
Under political pressure, especially from Italy, the ECB Mulls Shelving Rules Tackling the Eurozone's Bad Loans Pile.