Belmont Club

The Italian Job

“With Italian bond yields surging higher, analysts said Italy is at the brink of being unable to afford to borrow in the public markets,” according to the Wall Street Journal. The beleaguered country is being forced to pay more to service its debt and to post up more collateral than it might have.

Less than two weeks after European leaders unveiled an agreement that was designed to bolster confidence in the region, the yield on Italy’s 10-year debt drew close to the 7% mark, a line in the sand of both practical and psychological importance to the market.

Psychologically, 7% has become a beacon due to the fact that Greece, Portugal and Ireland each sought bailouts soon after their debt reached these levels. While analysts said it is too simplistic to say that Italy will be forced to ask for support if its 10-year debt yields 7%, they said the recent selloff is taking the country to the tipping point.

“I don’t know if 7% is the upper limit, or if it’s 6.9% or 7.25%, but I do know [Italy] can’t go on for very long having these kinds of bond yields,” said Gabriel Stein, director at Lombard Street Research in London.

The sixty four trillion Euro question is: what can the EU do to save it? The answer is apparently ‘not much’. Even the resignation of Silvio “Bunga-bunga” Berlusconi did not halt the markets any more than a human sacrifice would slow an oncoming tsunami. The only option for the EU is to authorize the European Central Bank to print money to backstop Italy. But the specter of printing money is proving too much for German bankers for whom the memory Weimar inflation is nearly as traumatic as the Holocaust was to the Jews.

“One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press,” Weidmann, who heads Germany’s Bundesbank, said in a speech in Berlin today. The prohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and “specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I,” he said.

But just as Berlusconi was sacrificed to appease the gods of fate, so too may the prohibition against printing money be ultimately laid on the altar of the European Union. Not that it will help, but it will make the Eurocrats feel like they’re doing something. Here is the scene in Brussels as the EUniks sacrifice a virgin to Donkey Kong. Good luck guys.

Update:

Reuters says the crisis in Greece and Italy are amping up. Italian banks are paying increasingly higher costs for their debt. Even the EFSF is having trouble raising money.

In a sign that Italian banks are increasingly shut out of wholesale money markets, the ECB reported they needed 111.3 billion euros in central bank funding in October, up from 104.7 billion euros in September and a mere 41.3 billion in June.

Even the European Financial Stability Facility, the euro zone’s bailout fund, had difficulty finding buyers for its top-notch AAA-rated paper on Monday, drawing barely enough bids for 3 billion euros of 10-year bonds issued to support Ireland.

So much for Italy, the land which gave birth to bologna. Not to be outdone, in Athens politicians were doing a creditable job of imitating Hitler in his last days, behaving as if some General Steiner would attack to relieve Berlin — or in this case, Greece.

In Greece, the ruling Socialists and the conservative opposition were laboring to agree on a national unity government, expected to be headed by former European Central Bank vice-president Lucas Papademos.

The aim is to establish a “100-day” government to push a 130 billion euro ($180 billion) bailout package, including a “voluntary” 50 percent writedown for private sector bondholders, through parliament before elections in February.

Papandreou, the son and grandson of prime ministers, said farewell to his cabinet at the meeting, a participant said. He asked ministers to tender their resignations.

“Negotiations are being finalized with Papademos as PM,” a Socialist party source told Reuters.

But when politicians start talking in terms of “100 days” and not years, then you know the brink is near. Good luck guys.

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