Saturday, 1 January 2011

Italy's debt costs approach red zone

Italy's borrowing costs have jumped to the highest level since the

financial crisis over two years ago, raising concerns that Europe's

biggest debtor may slip from the eurozone's stable core into

the high-risk group on the periphery.

Italy's debt costs approach red zone
A man waits for a bus near piles of uncollected garbage in Pozzuoli, Italy Photo: AFP/Getty Images
By Ambrose Evans-Pritchard, International Business Editor6:37PM GMT 29 Dec 2010

222 Comments

Yields on 10-year bonds rose 10 basis points to 4.86pc after a poor auction of short-term debt in Rome. The Italian treasury had to pay 1.7pc to sell €8.5bn (£7.2bn) of six-month bills in a thin post-Christmas market, up from 1.48pc a month ago.

The spike in rates came as money supply data released by the European Central Bank showed that real M1 deposits have collapsed at a rate of 2.8pc over the last six months in the EMU bloc of Italy, Spain, Greece, Ireland and Portugal, even though they are rising in northern Europe.

"This is comparable with the decline in early 2008 just ahead of the plunge into recession," said Simon Ward from Henderson Global Investors. "The eurozone periphery is locked into a 'double dip' that will undermine fiscal consolidation."

Italy's M1 contraction began later than elsewhere in southern Europe but is now accelerating. M1 typically gives advance warning of economic shifts by six to nine months.

Mr Ward said signs of recovery in the ECB's broader M3 money data is less reassuring than it looks since the gauge was temporarily boosted by flight to liquid assets on EMU debt worries.

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The poor auction in Rome may be a warning sign that EU leaders offered too little to restore confidence at their Brussels summit two weeks ago.

German Chancellor Angela Merkel vetoed the creation of eurobonds or any serious move towards fiscal union, and shot down calls for an increase in the eurozone's €440bn emergency loan fund. The ECB has so far refused to step in to the breach with overwhelming action.

Willem Buiter, Citigroup's chief economist, said the response had been "woefully inadequate", raising the risk of fresh bank failures and a wave of sovereign defaults next year. He said the EU authorities may need a mix of measures worth up to €2 trillion to stop the rot.

Italy avoided the sort of property bubble seen in Spain or Ireland and has kept a tight rein on public spending under finance minister Giulio Tremonti. However, the rise in yields looks ominously like the pattern seen in Greece, Ireland, Portugal and Spain when they first began to lose easy access to the capital markets.

Neil Mellor, currency strategist at the Bank of New York Mellon, said big institutional investors have been pulling funds out of Italy and rotating into German debt on a large scale. "Our flow data shows that the trend has been just as concerted out of Italian debt as it has been out of Irish or Greek debt. Italy should be able to weather 2011 in good shape but the government's debt dynamics are very poor," he said.

Italy is too big to be rescued by a diminishing group of creditor states in the EMU core, should it ever need help. Public debt will creep up to 120pc of GDP next year – or over €1.9 trillion – a level widely seen as the outer limit of debt sustainability.

The country's trump card is a high savings rate and low private debt. Total debt is 245pc of GDP, below the eurozone average, and much lower than in Spain, Britain, the US or Japan. This may be the relevant indicator for an economy as a whole.

However, low private debt may equally reflect deep pessimism in a country where growth has been glacial for a decade, productivity has fallen since 1995, and global export share is in steep decline.

S
ugursrt
Today 12:28 PM
Mr.Ambrose Evans-Pritchard.
What about Turkish Economy

KlingonOffTheStarboardBow
Today 06:49 PM
It is a delight ......
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helenscott
12/31/2010 01:58 AM
Recommended by
3 people
.
"In this global debt crisis we have heard several new notions: Too Big to Fail (AIG) and Too Big to Bail (Spain) and now I would like to add one more - Too Big to Mention. And to that category I would like to assign Unicredit as its founder member.

Unicredit is an institution that never gets mentioned because it is SO big relative to its parent nation that their fates are one. Whatever happens to Unicredit happens to Italy. Thus whatever problems Unicredit may or may not have, no one mentions them because everyone knows Unicredit has the 100% backing of the Italian State and Treasury. You mess with Unicredit, you mess with Italy."

David Malone who had worked as a documentary maker for the BBC for 8 years, wrote the above on his Golem XIV blog three weeks ago. Here is the link to it:

Malone also wrote a piece titled 'Madoff, UniCredit and Ireland's regulatory silence' -

Village magazine in Ireland ran this cover story just two weeks ago about UniCredit Ireland's adventures (courtesy of an obliging Irish regulator):

The wistleblower, who has in the meantime revealed that he was UniCredit's Risk Manager in Ireland, has been revealing more of the story on his blog:

Posted by Britannia Radio at 23:51