Compared with debt-saddled Greece, Spain and Ireland, Italy is much less reliant on foreign investors to finance its debt. And more so than in any other euro zone country, Italian citizens have been active buyers of government debt, with such bond holdings representing 10 percent of household assets. So far, the evidence suggests that Italian households are not panicking.
EU Banks Struggle to Attract Deposits – WSJ.com
Deposit levels at five of Spain’s top six banks declined in the third quarter, while five of Italy’s largest lenders also reported declines, according to a report by analysts at Citigroup. In some cases, individuals pulling their money out of a bank are instead buying the bank’s bonds, which have offered hefty interest rates lately. But corporate clients, who find it relatively simple to move cash from one international bank to another, appear to have been especially aggressive in scaling back their deposits at southern European banks. Spain and Italy’s largest banks each reported declines of at least 10% in the quarter that ended Sept. 30.
The World from Berlin: Will Merkel Change Her Tune on Euro Bonds? – SPIEGEL ONLINE
The left-leaning Berliner Zeitung writes:
“People in the euro crisis have become accustomed to one constant: What Chancellor Angela Merkel categorically rejects today can still be implemented tomorrow. That makes the euro-bond debate … so exciting. A ‘no’ from Berlin doesn’t necessarily mean the last word.”
“There are many indications that Germany will have to finally give in again and accept one of two solutions: Either increased bond purchases by the ECB or euro bonds. But in exchange, Merkel will exact a price. She wants to use the acute urgency to construct a euro zone that corresponds to her vision…. If Europe allows this new currency union with rigid controls for countries that exceed debt limits, then Merkel will open herself up to things she has so adamantly rejected. But she’s begun a dangerous game. It could come to pass that that the currency union she wants to stabilize according to German plans may no longer exist. Then even the best treaty amendments won’t help.”
The Wages of Economic Ignorance – Robert Skidelsky – Project Syndicate
Despite austerity, the forecast of this year’s UK structural deficit has increased from 6.5% to 8% – requiring an extra £22 billion ($34.6 billion) in cuts a year. Prime Minister David Cameron and Chancellor George Osborne blame the eurozone crisis; in fact, their own economic illiteracy is to blame. Unfortunately for all of us, the explanation bears repeating nowadays. Depressions, recessions, contractions – call them what you will – occur because the private-sector spends less than it did previously. This means that its income falls, because spending by one firm or household is income for another.
In this situation, government deficits rise naturally, as tax revenues decline and spending on unemployment insurance and other benefits rises. These “automatic stabilizers” plug part of the private-sector spending gap. But if the government starts reducing its own deficit before private-sector spending recovers, the net result will be a further decline in total spending, and hence in total income, causing the government’s deficit to widen, rather than narrow. True, if governments stop spending altogether, deficits will eventually fall to zero. People will starve to death in the interim, but the budget will be balanced.
via The Wages of Economic Ignorance – Robert Skidelsky – Project Syndicate.
Self-serving myths of Europe’s neo-Calvinists – Telegraph Blogs
From a paper by Philip Whyte and Simon Tilford for the Centre for European Reform… a pro-EU group with a broadly free-market leaning.
Eurozone leaders now face a choice between two unpalatable alternatives. Either they accept that the eurozone is institutionally flawed and do what is necessary to turn it into a more stable arrangement. This will require some of them to go beyond what their voters seem prepared to allow, and to accept that a certain amount of ‘rule-breaking’ is necessary in the short term if the eurozone is to survive intact. Or they can stick to the fiction that confidence can be restored by the adoption and enforcement of tougher rules. This option will condemn the eurozone to self-defeating policies that hasten defaults, contagion and eventual break-up.
via Self-serving myths of Europe’s neo-Calvinists – Telegraph Blogs.
Bond markets v. the Deficit Supercommittee – Evan Newmark
The bond markets will have their say. They have voted in Europe — electing new governments in Greece, Italy and Spain — and the time is fast approaching when they will cast their vote in the US as well.
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Cut in Europe Bank Lending Has Wide Impact – WSJ.com
European banks in recent years dramatically boosted lending to emerging markets and were among the biggest cross-border lenders in these countries. Their retreat has tightened credit in industries—from aircraft to media to mining — squeezing economies already feeling the effects of reduced demand from the developed world for their exports….”We’re in a very vulnerable position that’s definitely impacting global growth,” Gail Kelly, chief executive of Australia’s Westpac Bank said at The Wall Street Journal CEO Council last week. “It’s certainly impacting in my country and in Asia.”
Europe: breach of medium-term support would signal decline
Italy’s MIB index is testing medium-term support at 15000 on the weekly chart. Failure — and respect of the descending trendline — would warn of another decline, with a target of 9000*. Breach of primary support at 13000 would confirm.
* Target calculation: 13 − ( 17 − 13 ) = 9
France’s CAC-40 index is similarly testing support at 3000. Breach of support would warn of another decline — as would reversal of 13-week Twiggs Money Flow below zero. Failure of primary support at 2700 would offer a target of 2000*.
* Target calculation: 2700 – ( 3400 − 2700 ) = 2000
The DAX is also testing medium-term support. Reversal below 5600 would warn of another test of primary support at 5000. Failure of 5000 would offer a target of 3600*.
* Target calculation: 5000 – ( 6400 − 5000 ) = 3600
Even the FTSE 100 index is testing medium-term support. 13-Week Twiggs Money Flow looks stronger than its European neighbors, but reversal below zero would warn of a further decline. Breach of medium-term support at 5350 would warn of a test of primary support at 4800.
* Target calculation: 4800 – ( 5600 − 4800 ) = 4000
Debt Crisis Contagion: The Euro Zone’s Deadly Domino Effect – SPIEGEL ONLINE – News – International
The main problem of a Greek exit from the euro zone is not necessarily the direct impact on banks. I believe our government when they say that they would be able to get that under control. The real problem is the next domino. The crisis will spread unchecked to Italy. If Greece leaves the euro zone, then owners of Greek bonds will lose their entire investment. At best, the Greeks would pay them back a small part of their investment — in almost worthless drachmas.
So what kind of investor in his or her right mind would purchase Portuguese, Spanish or Italian sovereign bonds in this kind of situation? Not even a yield of 7 percent can make up for all the risk that Italy won’t be able to pay back its debt. As things now stand, Italy’s debt accounts for 120 percent of its annual GDP, growth is close to zero and the country is currently slipping into a deep recession. In fact, it’s a matter of mathematical inevitability that Italy won’t be able to service its loans if interest rates on its sovereign debt don’t fall. Granted, there have to be reforms. But reforms don’t resolve an acute debt crisis. We’ve already learned that lesson from other crises.
via Debt Crisis Contagion: The Euro Zone’s Deadly Domino Effect – SPIEGEL ONLINE – News – International.
Bill Gross: A fundamental flaw in the global economy
What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets no longer have an appetite for it.