Hilarity in NIRP Zone: Italian 2-Year Yield Still Near 0%, as New Government Proposes Haircut for Creditors and Alternate Currency, Markets on “Knife Edge”

The ECB’s Negative Interest Rate Policy has been the funniest monetary joke ever.

The distortions in the European bond markets are actually quite hilarious, when you think about them, and it’s hard to keep a straight face.

“Italian assets were pummeled again on mounting concern over the populist coalition’s fiscal plans, with the moves rippling across European debt markets,” Bloomberg wrote this morning, also trying hard to keep a straight face. As Italian bonds took a hit, “bond yields climbed to the highest levels in almost three years, while the premium to cover a default in the nation’s debt was the stiffest since October,” it said. “Investors fret the anti-establishment parties’ proposal to issue short-term credit notes – so-called ‘mini-BOTs’ – will lead to increased borrowing in what is already one of Europe’s most indebted economies.”

This comes on top of a proposal by the new coalition last week that the ECB should forgive and forget €250 billion in Italian bonds that it had foolishly bought.

The proposals by a government for a debt write-off, and the issuance of short-term credit notes as a sort of alternate currency are hallmarks of a looming default and should cause Italian yields to spike into the stratosphere, or at least into the double digits.

And so Italian government bonds fell, and the yield spiked today, adding to the prior four days of spiking. But wait…

Five trading days ago, the Italian two-year yield was still negative -0.12%. In other words, investors were still paying the Italian government – whose new players are contemplating a form of default – for the privilege of lending it money. And now, the two-year yield has spiked to a positive but still minuscule 0.247% at the moment. By comparison, the US Treasury two-year yield is 2.57% over 10 times higher!

Here is the hilarious chart of the spiking Italian yield from the negative into the positive:

“The market will remain on somewhat of a knife edge as regards the intended plans and as the coalition government itself evolves,” Rabobank International analysts wrote in a note, cited by Bloomberg. “The fiscal credibility of the plan is far from guaranteed.”

The market will remain on somewhat of a knife edge… and because of the market is so seriously in fear of a haircut and a default, the yield eases finally into the positive, but barely?

This is an over-indebted government that doesn’t control its own currency and cannot print itself out of trouble and whose new leadership – made up of the coalition of the Five Star Movement on the left and the League on the right – is proposing a haircut for its creditors to make the debt burden easier, and is also proposing the issuance of an alternate currency to give it more money to spend, even as it also promises to crank up government deficit spending and cut taxes too.

So how is it possible the two-year yield was until Wednesday still negative? The 10-year yield is only at 2.35% at the moment. How is this possible?

It has been possible because the ECB, run by an Italian, has been buying Italian government and corporate bonds hand-over-fist, along with bonds from other countries in the Eurozone, as part of its QE, in order to do “whatever it takes,” and what it took was to stop any and all price discovery, and to force investors – such as life insurers and retirement schemes that have to buy euro bonds – to buy Italian bonds even when the yields were negative. These outfits, actually their beneficiaries whose money this is, are now pocketing guaranteed losses. So it’s not hilarious to them.

But the ECB has tapered its bond purchases to €30 billion a month, and will likely end them this year. Leadership at the ECB will change in 2019, and Italy will lose its champion at the ECB. And it’s possible that the new leadership at the ECB might allow some price discovery to happen – at least until Italian government bonds re-implode as they did in 2011, with the 10-year yield above 7%, before Draghi’s “whatever it takes” promise in 2012.

In the US, more changes in the mortgage market may be in the offing. Read…  Will the New Fed Get Rid of All its Mortgage-Backed Securities? That Seems to be the Plan 
 

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  93 comments for “Hilarity in NIRP Zone: Italian 2-Year Yield Still Near 0%, as New Government Proposes Haircut for Creditors and Alternate Currency, Markets on “Knife Edge”

  1. Setarcos
    May 21, 2018 at 10:48 am

    Man walking down the street sees a pickpocket, so he drops his wallet and then offers the pickpocket a few bills to pick it up.

    At what point does the insanity end?

  2. Ambrose Bierce
    May 21, 2018 at 10:50 am

    They have about the same debt to GDP as the US? I have always thought we need a separate currency, whose value is linked to the size of the monetary or investment base. A sweat money index. Italy’s currency might be gold backed. As for Draghi who now heads the ECB, a job which prevents him from showing partiality, when he returns to Italy he can devote his full time to THEIR problems. As I understand it the right/left coalition agrees on two things, tax cuts and more spending. Trump-a Bunga

    • Frederick
      May 21, 2018 at 11:07 am

      Draghi is NOT Italian in my opinion His loyalty resides elsewhere

      • d
        May 21, 2018 at 6:42 pm

        Draghi is a member of P2, his primary loyalty is to his masters there. Then italy.

        • Kaz Augustin
          May 21, 2018 at 9:54 pm

          Ah, I didn’t know this. Interesting. Thanks d.

        • van_down_by_river
          May 21, 2018 at 11:11 pm

          Draghi’s loyalties:

          1) Goldman Sachs (his once and future paycheck)

          2) Beloved mother Italy

          last on the list – at the very bottom: German savers

        • d
          May 22, 2018 at 1:54 am

          Here’s a Fact, when P 2 calls, you pick up the phone, and do as you are told.

          The “Mafia” in Italy is layered. Toto rinnia Et al are the street layer. They do their own thing, but cooperate when the top needs them to.

          https://www.thelocal.it/20151216/controversial-p2-masonic-leader-dies-in-italy

          Draggi is on that list.

          Italy, much like Japan, is a very complex place, with an old and deep history.

  3. Valuationguy
    May 21, 2018 at 10:52 am

    Agree with you on the hilarity (if you are OUTSIDE looking from afar).

    The yields on future Italian bonds are going to jump to over 10% when/if the ECB’s support is withdrawn…..which of course will devastate the Italian budget immediately throwing the entire EU into further crisis as the fiction that Italy can roll its existing bonds forward is put to rest.

    Good thing that the Europeans can use the accounting rules to hold the current bonds at their acquired value rather than the market rate.

    There is NO LIQUIDITY in the market for Italian gov’t bonds (without the ECB) and EVERYONE knows it. However, pretending until the ECB runs out of room is seen as the lesser evil than biting the bullet two years ago when it was known to be inevitable.

    It will be Greece QUADRUPLED (if not more given the inability for the EU banks to absorb the losses without MORE accounting and regulatory schenanigans).

    • Frederick
      May 21, 2018 at 11:08 am

      There’s ALOT of wealthy Italians with great big fat SWISS bank accounts

    • May 22, 2018 at 12:58 am

      If Italy actually defaults, what is the exact exposure of ECB ?

      Ideally they should default and try to restructure. If fools are ready to lend you money, why should you care about them!

  4. Maximus Minimus
    May 21, 2018 at 11:30 am

    Makes sense to create direct government loans a.k.a mini-BOTs, when the government can still borrow at zero for the same duration. Breaks the rules, but the rules have been thrown out the window by the ECB, so…

  5. Mike Earussi
    May 21, 2018 at 11:42 am

    The more the EU tries to pretend that the laws of economics don’t exist the harder it will eventually bite them in the ass.

    • James Levy
      May 21, 2018 at 3:08 pm

      The “rules of economics” are embedded in both a political economy and a resource matrix that makes speculation hazardous. The United States, for example, can ride roughshod over “the rules” for quite some time because it can feed itself, has a largely passive population, its government enjoys tremendous legitimacy by global standards, it has immense firepower at its disposal, and, given strict rationing, is energy independent. if you are a small, resource-poor country you are much more in thrall to the “rules of economics.” If you are rich and powerful, not so much.

      • Gibbon1
        May 21, 2018 at 10:43 pm

        I have a theory which is a country like the us before 1965 or so didn’t need to worry about ‘money’ because big picture the economy was mostly a closed system. That ended when the US started importing huge amounts of oil and other raw materials.

        You could run the US on a command economy if needed. The US did that in WWII and the economy got bigger not ‘smaller’ like modern economists claim would happen.

        I think it’s still mostly true, especially since the US is again nearly self-sufficient in oil. And will be again as transportation electrification comes into force.

        The idea that there is some sort of cash flow limitation is a post modern mirage. People believe it because business schools and economics departments teaches people to be idiots.

        • van_down_by_river
          May 21, 2018 at 11:06 pm

          the U.S. is not “nearly self-sufficient in oil” When you import 40% of what you consume of a given commodity you are not anywhere near self sufficient.

          The U.S. produces around 10,000,000 barrels of oil per day.

          The U.S. consumes around 18,500,000 barrels of oil per day.

          Stop with the self sufficient crap already – someone might actually believe your nonsense.

          The U.S. could be self sufficient in oil if Americans were not hell bent on wasting it.

        • Gibbon1
          May 22, 2018 at 12:20 am

          van_down_by_river

          Mark your reality to market, half of US imports are from Mexico and Canada. And we’re selling worthless weapons to Saudi Arabia to pay for another 25%.

          So imports outside of our economic sphere are way way down. And they’ll stay down as electrification takes hold.

        • Frederick
          May 22, 2018 at 4:34 am

          VDBTR Thank you All very true

  6. Debt Free
    May 21, 2018 at 11:46 am

    I hear the Italian government is giving away free gift cards to Olive Garden when you buy a 2 year bond.

    • Frederick
      May 22, 2018 at 4:35 am

      Make it Red Lobster and you got a deal

  7. raxadian
    May 21, 2018 at 11:54 am

    You know, is amazing how ruined Italy is, that even this is cause of alarm.

    What makes Italy so special compared to Greece?

    • backwardsevolution
      May 21, 2018 at 12:13 pm

      raxadian – Greece was screwed to warn the others of what could happen to them if they didn’t toe the line. Italy’s debt, I believe, is so much bigger than Greece’s, thereby making it a bigger weapon to wield against the ECB.

      Also, if I remember correctly, Greece’s government just basically rolled over and let the screwing happen.

      • Valuationguy
        May 21, 2018 at 12:57 pm

        Well….Greece’s Finance Minister was the only one who tried to argue reality….but the politicians in the EU had to protect their nest egg…..so they applied backroom pressure on Greece’s PM to stab his own Finance Minister in the back and allow the EU (and Greece) to kick the can down the road another 4 years……or to whenever the NEXT country hit a crisis.

        Most of us thought Spain would crack first…followed by Italy…..but distractions in Spain with their independence movement allowed the increasingly autocratic gov’t to gloss over their banking problems (which will rapidly reappear once Italy goes into crisis).

        PS – Given Spain’s exposure to EM (especially Latin America)…there is still a decent chance it beats Italy….but my current bet is still on Italy to default first (by bail-ins).

        • Kaz Augustin
          May 21, 2018 at 10:36 pm

          Yep, that’s how I remember it too. There’s an extra-special level of hell waiting for Tsipras.

        • Harvey Darrow Cotton
          May 22, 2018 at 6:53 am

          Yanis Varoufakis. Yeah, he is everywhere promoting his books. Super charismatic.

      • d
        May 21, 2018 at 6:55 pm

        Greece screwed it self.

        It also seriopusly screwed, Cyprus, Portugal, Spain, Italy, france and the rest of the planet.

        When its revealed loan frauds turned an American correction event into the GLOBAL FINANCIAL CRISIS WE ARE STILL IN.

        The warning was that it was allowed to suffer some of the results of its fraudulent behavior. In reality is should have been ejected from the EZ and EU.

        The leftist dictators in brussels didnt like that idea as it would upset the “ever closer union” momentum. It has any way.

        The only peopel responsible for the problems in greece, are the greek’s.

    • May 21, 2018 at 1:14 pm

      Size

      • Jose
        May 21, 2018 at 3:18 pm

        Matters.

    • Javert Chip
      May 22, 2018 at 3:59 pm

      What makes Italy so special compared to Greece?

      Population of Greece = 10M; population of Italy = 60M.

      The EU could BARELY contain what happened to Greece (as long as the remaining population agreed to live like it was 1920 all over again; AKA dirt poor).

      • d
        May 22, 2018 at 7:31 pm

        “The EU could BARELY contain what happened to Greece ”

        As the IMF wanted the ECB and other EU central banks to take a MASSIVE haircut on greek debt. Great for greece, catastrophic for everybody else in the EZ.

        This would have devalued the Eur by over 50 % and made it worthless internationally for decades. So the Ecb and Northern central banks would not play. As their countries would no longer have been able to afford oil and gas, had they done as the IMF initially demanded.

        You also now have a similar Anti Eu administration in italy that thinks it walks on water, and can do as it wishes, as you had in greece. That worked out really well for greece, dint it?

        This time we may see the North south Split the the Ez with france in the southern currency that was talked of last time.

        The current Ez has to many Deadbeat/Incompatible Economies in it for fiscal union to be possible, let alone occur. Further Countries like greec spain and italy are not willing to bring their banking systems and deficits, into line with the others, as they see fiscal union giving them a free ride on their current Debt. So the insanity of Eur continues, until a big problem finally faces it.

        italy combined with Brexit could be that problem.

        The ECB is heading to a precipice, protect italy, and go over it. or protect the Eur and avoid it

  8. Bobber
    May 21, 2018 at 12:06 pm

    How much of that cheap European money if being invested in the United States, artificially propping up asset values here. If you can borrow in Europe at 0% and invest it in US assets yielding 3% or better, why wouldn’t you do that? Maybe that’s why the dollar has been rising.

    • backwardsevolution
      May 21, 2018 at 12:15 pm

      Bobber – yes, I did read somewhere that there was a ton of European money being invested in the U.S. stock market. Maybe Wolf has the figures on that.

    • jon
      May 21, 2018 at 12:38 pm

      I have exactly the same question ?

      If USA rates are increasing and EU rates remain zero, then why would anyone keep money in EU.

    • Ambrose Bierce
      May 21, 2018 at 12:51 pm

      Maybe??? Maybe?

    • Maximus Minimus
      May 21, 2018 at 1:13 pm

      Why invest in the US, both currencies are artificially held up by a still more broken system elsewhere. Why not buy hard assets, e.g. a Brazilian power company with printed euros?

  9. RD Blakeslee
    May 21, 2018 at 12:15 pm

    Wolf,

    Is it not true that there has to be massive abrogation of debt worldwide, if the populace(including the wealthy “victims”) no longer trust the money?

    • May 21, 2018 at 1:16 pm

      Well, someone’s debt is by definition someone else’s asset. So if you wipe out the debt, you’ll wipe out the wealth too. That’s the problem with inflation as well. It’s not a free lunch.

      • RD Blakeslee
        May 21, 2018 at 1:59 pm

        “The wealth” in terms of the abandoned money only, right? Wealth will remain in “hard” assets.

        Part of my strategy in my little microeconomy is the things I build and my land will have VALUE if fiat money dies, although it will remain to be seen how and by what trusted currency they might eventually be PRICED.

        Historically, mankind has always needed an “exchange abstraction” (money) so a new currency will eventually arise.

        New “Brextion Woods” summit? Agreement among the governors on a gold-based “NewNote”?

        Who knows?

      • van_down_by_river
        May 21, 2018 at 10:57 pm

        Bernanke proved, with QE3, that central banks don’t mind wiping out the wealth of certain participants in the economy. Fed policy greatly enriched a certain segment of the population, and as you point out that wealth had to come from somewhere.

        Central banks will wipe out debts using their favorite new “policy tool” – inflation. Only those holding currency (bond holders) will be screwed – central banks don’t seem to care about those guys. Those holding hard assets paid for with borrowed money are given their wealth for free – central banks seem to love this crowd.

      • Ambrose Bierce
        May 22, 2018 at 11:04 am

        That definition is not pragmatic

        • Javert Chip
          May 22, 2018 at 4:12 pm

          Wolf’s definition is pragmatic; admittedly some have trouble understanding….

  10. KPL
    May 21, 2018 at 12:21 pm

    It is going to be very difficult for ECB to withdraw QE and raise rates. It will bring the house of cards which is what EU is. Let us see which EU chief has the gumption do this. Across the Atlantic the Fed is adding to its woes by raising rates and QT. The CBs are going to find out a coordinated QE (and dropping rates like a stone) is much much easier than a coordinated QT (and raising rates).

    We live in interesting times indeed.

    • Ambrose Bierce
      May 22, 2018 at 11:14 am

      Interesting point about QE QT and raising rates. I have always thought, they can do it, but it won’t be easy, unless they coordinate a drop in currency value which would appear to be nothing at all in the fx market, but would reflect greater credit risk, they can set rates lower and allow the market to haircut the bonds at auction, effectively subsidizing lower rates. say if 30yr rates are 5% and you set your auction rate at 4% and sell the bonds for 90 cents on the dollar, then its not really your problem.

    • fajensen
      May 23, 2018 at 1:23 am

      It is going to be very difficult for ECB to withdraw QE and raise rates.
      They are going to do it. Their game is about institutional credibility, right now everyone knows that the ECB will backstop anything so “everything goes” and the ECB needs to show that this is actually not the case. The tricky bit is that the national parliaments and media are always ready and willing to stick the EU with whatever stupidity and mess the national parliaments managed to get themselves into.

      Following the institutional credibility- and enemies within- trails, I believe that the ECB now is simply waiting for some good backstory / event that does not leave the responsibility with the ECB for crashing the markets. Brexit or Italy going potty – both are good exit points for the ECB.

  11. Max Power
    May 21, 2018 at 12:41 pm

    So when they do finally default, who’s gonna take the hit, ze Germans (via the ECB)?

    • Anon
      May 21, 2018 at 1:28 pm

      Obviously. They are the only ones without debt.

    • Javert Chip
      May 22, 2018 at 4:24 pm

      The closer people are to being an economy with low/declining productivity or failing to produce much of anything anybody else is willing to pay for, the higher the probability you get to live like Greeks (AKA dirt poor).

  12. raxadian
    May 21, 2018 at 12:43 pm

    Borror money in the Eurozone super cheap rates and invest in the US? Truly Europe has never been so good at ruining itself.

  13. backwardsevolution
    May 21, 2018 at 12:53 pm

    Draghi is calling for a “consolidation of national debts into a single Eurobond market. There is no bond market that is viable in Europe after the end of Quantitative Easing. There will be NO BID.

    There is no viable bond market left in Europe. The worst debt is below US rates only because the ECB is the buyer. Stop the buying and the ceiling comes crashing down. […] If the banks in Italy need a bailout from Brussels, then other members will look at it as a subsidization for Italy which is unfair.

    There is no real EU unity behind the curtain which is when the debt was NEVER consolidated from day one. They wanted a single currency, but not a single responsibility for the debt.”

    https://www.armstrongeconomics.com/international-news/europes-current-economy/draghi-calls-for-consolidation-of-debts/

    • cdr
      May 21, 2018 at 2:56 pm

      Agree. I’ve said similar things for a long time. ECB QE started when Eurozone rates rose above market and the natural urge of the Eurozone to kick the can prevailed. ECB QE was invented, to complement Fed QE, BOJ QE, Chinese QE and more, Swiss adventurism to print money to buy US equities, and probably more around the world.

      QE only works when everyone does it. ZIRP and NIRP replace interest income. Money printing replaces capital from savings and asset bubbles replace income from saved capital. As a result, real capital is consumed due to lack of good investment opportunities and nesessity. Deflation results from the lack of real income from capital. Economic stagnation replaces demand-push inflation and growth. Movieland dystopia grows from it over the long run.

      What is imponderable is why this scam worked for so long. The Fed blew it out of the water by starting to normalize rates. The euro-need to spend without asking others to cut back is killing the Eurozone, and soon to be successful.

      Even today, it seems a majority of reporters and people with common sense think that ECB QE will end and nobody will notice much, overall, unless they’re geek financial wonks. I think it will be more akin to a six mile wide meteor landing in Berlin in plain sight, only in slow motion while politicians lie about it.

      The only thing certain, besides the ultimate end of the eurozone, is how all euro-parties will bluff and lie and distract while praying for a miracle that only occurs … never.

      • cdr
        May 21, 2018 at 3:06 pm

        Later this year, ECB QE will ‘end’ but be replaced by a new venture that prints money and refinances the debt that rolls off. It won’t be called QE and anyone who refers to it as QE will find access to Euro-flacks revoked. Rates won’t change if they involve actual money being used to pay interest. ZIRP and NIRP will continue as debt is refinanced using printed money.

        The magic’ Kick the Can’ euro-spell will be invoked once again using new words to describe printing money to monetize euro-debt. The spell will actually cause the business media and the economics profession to go stupid once again and support the bold new venture, probably under pain of loss of employment if they don’t go along.

    • d
      May 21, 2018 at 7:27 pm

      You cant have debt consolidation with out:

      1 1 set of banking rules with 1 maximum npl and minimum capital ratio everywhere. Which the Eu still dosent have.

      2 1 maximum level of state debt and deficit everywhere. Which the Eu still dosent have.

      Currency Union, with out fiscal Union, is an insanity.

      The greek frauds, really upset the EZ/ECB apple cart, they still haven’t picked up half of the few good apples left yet.

  14. backwardsevolution
    May 21, 2018 at 1:00 pm

    “As a result, around 20% of Italy’s industrial capacity has been destroyed, and 30% of the country’s firms have defaulted. Such wealth destruction has, in turn, sent shock waves throughout the country’s banking system, which was (and still is) heavily exposed to small and medium-sized enterprises (SMEs). […]

    If we take these categories into consideration, we arrive at a staggering effective unemployment rate of 30%, which is the highest in all of Europe. Poverty has also risen dramatically in recent years, with 23% of the population, about one in four Italians, now at risk of poverty—the highest level since 1989.”

    https://americanaffairsjournal.org/2018/05/italys-organic-crisis/

    United States of Europe or sovereignty.

    • Manuel Barradas
      May 21, 2018 at 2:07 pm

      @backwardsevolution, small and medium-sized enterprises are closing in droves, that is of course the bigest problem !

      EUssr general direction of competition did not take into account what QE would do to SME companies!

      While Big companies get funding at 0.8%~1.2% (even zombie companies), SMEs when they go to the bank they see interest rates of 8~14%

      Take for example IT chain stores!
      Do you know how much are they earning on a Laptop ?

      3 fu….king € euros

      Yes, you read it right, they win 3€ selling a laptop, because they have funding to buy and sell all over Europe.

      How a SME can compete with big “chain stores”.

      Don’t forget, this is only and example.

    • Nick
      May 21, 2018 at 9:09 pm

      Travelling through eastern Europe and its quite shocking to see the evolution of those economies. Cafes on every corner, filled with people, lots of locals too.

      Its not that there’s a lot of growth but in major cities Croatia / Albania / Macedonia where income is in the 10-12k/year an apt near the center of the capital city is in the 100-300k range. For traditional European brick construction. They don’t believe in Wood houses.

      Lots of tourists (mostly western Europeans) travelling there for vacation and many Italians choosing to retire there. Living in Italy as a retiree on a 1000/euro/month stipend not so sexy but move to the coastlines across the Mediterranean, et voila, you’re upper middle class.

      An old Italian couple mentioned how the beaches near Saranda, AL reminded them of Italy in the 60s. Could be the lack of a certain type of foreigners since there’s no welfare help for refugees/immigrants.

      21% unemployment, Italian youth serving coffee in London while your retirees spending their pensions outside the border.

      So this new parallel currency, what will it be called? TopoGigio?

      Italia che fai? Mama Mia!

  15. MC01
    May 21, 2018 at 2:21 pm

    First of all a premise. I am part Italian (the rest is French… pity me) and I have been living in Italy for a few years, albeit right now most of my business is abroad and I have been pondering about moving abroad again, partly for professional reasons and partly because I cannot really stand the place anymore.

    Now let’s get to business.
    Italy has been flooded with dirt cheap credit for years after Draghi pledged to do “whatever it takes”. It was not uncommon to see banks offering mortgages at Euribor six months/one year plus 1% or car dealerships offering loans under 2% EAPR. The government itself has engaged in some, shall we say “bizarre” fiscal policies (chiefly regarding tooling/equipment ammortization and full time hiring) which go a long way to explain why despite the so-called “austerity” sovereign debt is as out of control as it was in the 80’s.
    On top of this the banking system has been not merely artificially but criminally propped up and forms of “alternative” labor (interinal, on call, seasonal etc) have exploded. I could go on a bit more but you get the idea: every trick in the book to goose nominal GDP figures but zero meaningful reforms.

    All of this to have an economy stagnating at best and still out of control unemployment: earlier this year the Statistics Institute changed the definition of “inactive”, pretty much doubling the statistical group overnight and providing the previous government some bragging material which didn’t save them from a well deserved electoral beating.

    The amount of bad calls and especially purely speculative “investments” I’ve seen piled up over the past few years is simply staggering. It’s not a matter of if but of when this will have to be liquidated and it remains to be seen if the new government will behave like its predecessors, engaging in fiscal acrobatics merely to extend the dealine a tiny bit further, at the price of building an even bigger fiscal ticking time bomb.

    Of course all of this depends on the goodwill of whoever will be in control of the European Central Bank in the very near future. As François Mitterand said back in the days, the ECB is independent in name only: in the end it’s the European Council setting monetary policies for purely political ends.
    And politics can change quickly, even in Europe.

    • Nick
      May 21, 2018 at 9:16 pm

      Isn’t the next ECB Chief supposed to be a Tedesco?

      • MC01
        May 22, 2018 at 2:36 am

        There’s a saying in Italy that translated goes more or less “He who enters the Conclave as Pope exits as Cardinal”, meaning the candidate on everybody’s lips rarely gets elected to anything.

        Personally I believe the next ECB president could well be an alien from Zeta Reticuli or an Egyptian mummy: as Mitterand said it’s not up to him to take the decisions that matter. His role is merely to oversee the technical part of monetary policies and talk up financial markets, albeit the latter are so gullible it’s not exactly something to be proud of.

  16. Steve clayton
    May 21, 2018 at 2:25 pm

    Sad Whats happened in Italy, great companies like Pirelli are a shadow of themselves. Hi Wolf, as an aside have you seen the news story about Deutsche Bank stopping fresh fruit being bought for it’s staff as it’s cost cutting everything, desperate springs to mind?

    • Manuel Barradas
      May 21, 2018 at 3:14 pm

      Pirelli ~64% is owned by Marco Polo Asset.

      All this ultra low interest rates (QE/NIRP/ZIPR) led to mergers and acquisitions which COULD NOT HAVE happened in normal market interest rates conditions.

      The unattended consequence of all these mergers and acquisitions is that these business clusters are in the hands of few people. Killing the SMEs in the process.

      Media business
      Cars
      Medications
      Dog Food (I’ve read an article, can’t recall where, it said that there are to much brands of dog food, but for real they belong to two solo owners)
      Health Care
      IT

      Well you name it

    • Nick
      May 21, 2018 at 9:21 pm

      Oh please Steve,

      You call that desperate? A few bankers aren’t eating their fruits?

      My first experience in a company going through bankruptcy,
      they rationed the bathroom paper towels to one per use, even had a sign.

      Forget the food groups, worry when they start sacrificing personal hygiene

      • Ed
        May 21, 2018 at 11:26 pm

        I worked at a company that sent a company-wide email to please return to the stores any unused office supplies.

        You know, paper clips, staples.

        That had to hurt morale much more than it saved. The company was already having almost yearly layoffs and so good people were all leaving or thinking of leaving.

    • Frederick
      May 22, 2018 at 4:44 am

      Fresh fruit Ohhh Nooo Not fresh fruit Let me know when they cut out Kobe beef and Maine Lobster

  17. van_down_by_river
    May 21, 2018 at 3:14 pm

    I have been made to understand the ECB is buying more European government debt then those governments are issuing. Draghi is an Italian. Does anyone really believe the Italians will (or can) pay back the debt?

    Eventually the ECB will forgive the debt held as government bonds. In the end it was all just a silly game being played with electronic tokens – very easy to wipe clean. The only consequence is a collapse of the currency and central banks don’t seem to have cared about currency collapse since the turn of the millennium.

    Look at house prices, health care, professional services and on and on – price increases are insane and central banks want to pretend there is no inflation. Pretending never works out in the end, eventually reality crashes the party.

    Oh look! Stocks are up sharply yet again today, this despite the yield on the S&P 500 sinking below 1.8% (and the money needs to be borrowed to even pay that pittance). The world is awash in easy money, unfortunately workers aren’t getting much of it.

    Today a retail worker can’t afford housing – how long until he can’t afford food? Central banks are in love with their new, official, pro-inflation policies, these policies are terrible for workers and retirees but fantastic for the investor/speculator class. So central banks have officially adopted policies to benefit the rentier class at the expense of everyone else – when will we stop this insanity.

    • Gandalf
      May 21, 2018 at 4:38 pm

      van_down_by_river,

      Considering the ongoing severe obesity crisis throughout much of the Western world, food will be the least of the problems of the struggling lower and middle income classes.

      https://www.cdc.gov/mmwr/volumes/66/wr/mm6650a1.htm

      Some interesting statistics – Obesity rates are not that different among men by income group, whereas women with lower incomes have fantastically higher levels of obesity. The moral of the story: grossly fat men can still become POTUS, whereas if you are a woman, you had better be as skinny as Amal Clooney or Meghan Markle if you want to do really well in life, SI “plus-sized” swimsuit models be damned.

      Obesity rates do go up as the educational levels go down for both men and women.

      As a side note, I calculated once that if you stop eating completely, and just go on starvation levels of water and vitamins/minerals to stay alive, the most amount of weight you can lose is about half a pound a day. Which means if you are 100 lbs overweight, it will take you 200 days of starvation and no food just to get to your ideal body mass index. This of course explains how people starved in concentration camps and POW camps managed to survive.

      Hunger may be an existential threat in the severely mismanaged, war torn, or weather ravaged Third World/Second World countries, but I have yet to see a genuinely malnourished person in the Western world who got that way because of a true inability to get food (self-imposed starvation from anorexia nervosa being about the only cause of life-threatening malnourishment in the Western world)

      • farmlad
        May 21, 2018 at 10:01 pm

        Gandalf As if calories were the only nutrition required for humans or any animal for that matter.

        As a livestock farmer I need to make sure my animals are getting the right proportion of proteins to calories and also from the right sources. On top of that we do our best to make sure they are getting the right amounts of Macro Minerals as well as the Micro minerals and fiber and vitamins.
        Sadly many humans even in the US have no idea about quality balanced nutrition. Much of the obesity issue is due to peoples body craving essential nutrients and causing severe cravings for food and the subjects try to fill the craving with cheap foods that are usually high in carbs sugar or grain oils and viola they get fatter and fatter but are still suffering from severe malnutrition.
        In the end all these sickly malnourished people end up costing society a terrible price in healthcare, psychiatric drugs, abusive behaviors which lead to ever greater costs in law enforcement, prisons, child care and on and on. There are many directions to point fingers but the real question is how to reverse this degenerate cycle.

      • van_down_by_river
        May 21, 2018 at 10:28 pm

        Malnutrition is way off topic here but as long as you brought it up…

        Food is not making Westerners fat, garbage crammed down their pie-holes is making them fat. Soft drinks are not food. Doritos are not food. Mac & cheese is not food.

        Garbage made with government subsidized industrial feed-stocks is not food. The government heavily subsidizes the production of industrial, GMO corn used for the mass production of corn syrup and starch fillers. Corn syrup is not food.

        Because corn production is so heavily subsidized by the government, corn syrup is put in nearly all of the garbage Americans eat because it is nearly free – and who knows maybe the government is trying to kill off the redundant population before they riot in the streets. Why is corn syrup put in salsa? It tastes like s%@#, is it really cheaper then vinegar?

        It would appear most obese Americans are suffering from malnutrition, probably a major cause of all the mental instability and depression. The number one drug prescribed drug to Americans from 2014 to 2015 was an anti-psychotic (abilify) and it only dropped from the number one spot because it went off patent (no longer profitable).

        • Enrique
          May 22, 2018 at 7:55 am

          This is an extremely good post for several reasons.

          I think people in general (some highly aware/educated even) do not fully grasp the atrocious state of much of what is regularly eaten/available.

          Not coming from “conspiracy nutter” land in saying this either. Much results from 3rd and 4th order effects of idiotic government policies (i.e. ethanol scam leading to excess corn production leading to excess corn syrup).

          Also the almost uniquely US phenomenon of 8 million illnesses/conditions for which Big Pharma has invented a “cure” are in the mix with all of that. Would there really be so much “depression” if the Pharma industry had free run to pillage the US economy at will, for example?

        • d
          May 22, 2018 at 6:45 pm

          ” I think people in general (some highly aware/educated even) do not fully grasp the atrocious state of much of what is regularly eaten/available.”

          In the US perhaps, for the rest of us Food Made/Produced/Packaged in: USA, india, or china = put it down before it makes you dirty/sick and move along, quickly.

          Especially with the US resistance to labeling of “contains GM Ingredients”.

          You wont tell me what’s in it, default position must be “it must contain Poison/Something bad” so I dont buy it.

        • Cynic
          May 22, 2018 at 8:00 am

          The owner of Beretta – quite rightly – observed recently that too many people in America do drugs (prescribed by their ‘physicians’) drink heavily, and have disfunctional families.

          Hence all the shootings, unlike Italy.

          So many wished to be American in the 1930’s-50’s.

          Who on earth would now?

      • fajensen
        May 22, 2018 at 6:55 am

        Obesity rates do go up as the educational levels go down for both men and women.

        Like most “problems of society*” it’s a class thing:

        People who have to work 2-3 jobs to keep their nose above water will have less energy left over to take care of themselves. They eat more junk- and processed- food because it takes less effort to plan & prepare.

        People like me do 20% work and 80% meetings for 20x of what the minimum-wage people make; For us, it is way, way easier to fint in decent cooking and workouts into that schedule. We don’t even get fired when we get 6-9 weeks off for a sports-related injury!

        It’s not fair at all. OTOH I consider myself to be a very lucky person overall!

        *) Not really a problem, since “we” have designed society in this way, having a large underclass one bill away from bankruptcy, is rather A Feature.

        • Cynic
          May 22, 2018 at 8:02 am

          I certainly never see working class people jogging, even the unemployed. Only the professional classes.

  18. Sunny Sam
    May 21, 2018 at 3:14 pm

    If people really want to pay money for the privilege of loaning/giving money to someone who can’t pay it back, then I can post my address. :)

  19. Gershon
    May 21, 2018 at 4:16 pm

    We will not have honest markets or sound money until all of the “former” Goldmanites running the central banks for the exclusive benefit of their oligarch patrons are in orange jumpsuits and shackles in front of a non-complicit judge.

    • Frederick
      May 22, 2018 at 4:47 am

      “Non complicit judge” What’s that? Never heard of that

      • Javert Chip
        May 22, 2018 at 4:49 pm

        one who hasn’t worked for Goldman.

  20. peter
    May 21, 2018 at 6:20 pm

    Wolf, where is all this wash of money coming from? I mean the real person in the street is struggling to buy houses, food etc. But the world seems to be awash with idiots with too much money to throw around to give the rest unmanageable debts. So who has it? And why?

    • Gibbon1
      May 22, 2018 at 12:11 am

      It’s easy. Ten years of massive QE and the like which allows the connected to borrow and siphon off[1] huge amounts of money. The vast majority of it is used to buy assets, bonds. stock, stock buy backs, and real estate. Almost none of it is hitting wage earners.

      [1] You hold stock in a company you have control over. Have the company borrow money to buy back stock, which drives up the price. Cash out and sell the inflated stocks to captive capital (Pensions 401ks etc). You get richer. The ‘company’ and the suckers hold the bag not you.

    • Gershon
      May 22, 2018 at 1:01 am

      Where as all this money coming from?

      Have you not been paying attention for the past ten years, Peter? The Keynesian fraudsters at the central banks have conjured up countless trillions out of thin air to gift to their bankster accomplices so they can buy up the distressed assets of the proles. When a corrupt and venal .1% are ruling like feudal lords over the pauperized 99%, the Fed and its fellow central bankers will finally be able to say, “Mission Accomplished.”

  21. Lee
    May 21, 2018 at 6:45 pm

    Italy is the Argentina of Europe.

  22. Auld Kodjer
    May 21, 2018 at 7:25 pm

    Economic troubles – tick
    Overspending – tick
    The rise of an Eastern Empire – tick
    Government corruption – tick
    Mass migration – tick
    Decline in traditional values – tick

    Just one little Antonine plague to go, and all the ingredients for collapse will once more be in place

  23. andy
    May 21, 2018 at 8:46 pm

    Lots of Italy buffs here. How are all those private companies doing? Beretta, Gucci, Armani, etc

    • MC01
      May 22, 2018 at 3:34 am

      Gucci is not Italian anymore: it’s a division of French fashion group Kering. Bulgari and Fendi are the same, but controlled by LVMH, another French fashion/luxury group.
      Plenty of brands have been bought by French groups over the past decade: a few have been allowed a modicum of autonomy, but most are administered straight from France.

      Armani is still doing well, albeit the reason is simple: it’s still run by the people who led it to greatness and those they trained. The moment they’ll be replaced by professional managers (“toothpaste salesmen”, as an acquaintance of mine calls them) it will be game over, as usual.
      Their latest suits are an eyesore however, but that’s what the market demands right now.

      Beretta is doing well but it’s a far smaller firm than most believe (revenue is €600 million, tops), so it’s well structured to cope with the vagaries of fortune, such as military contracts starting to dry up right now.

      Ferrero has weathered a well-funded PR campaign (orchestrated by some well known agri concerns) for their use of palm oil. The company has been quietly moving most of their production sites outside of Italy and into other EU countries (chiefly France) and perhaps I should take the hint and follow them.

      Pirelli was bought by ChemChina in 2015.

      Need more?

  24. Gershon
    May 22, 2018 at 12:55 am

    True price discovery, when it finally asserts itself, is going to be a biatch.

  25. Rcohn
    May 22, 2018 at 1:29 am

    The ECB bought its 250b Italian bonds with money printed out of thin air.If Italy defaults ,these bonds are worth nothing ,so the ECB loses this money that was printed out of thin air.Bottom line the ECB loses nothing

    • May 22, 2018 at 8:35 am

      That’s not how the ECB is set up. The ECB is capitalized by the member states, and the individual central banks of the member states actually hold those bonds.

    • d
      May 22, 2018 at 7:03 pm

      Bottom line the ECB can not allow Italy to walk away unless it wants to completely destroy the Eur and the Eu.

      This goes back to the same argument, if teh ECB takes a big haircut over greece then all other nations that paid in the GFC get a huge rebate.

      The money italy owes the ECB, is a northern Eu taxpayers asset.

      You are crying Debt jubilee, those Debts, are somebody’s assets.

      Why must the frugal support the spendthrift.

      Why must the spendthrift always get a free ride.

  26. GTurco
    May 22, 2018 at 6:12 am

    Italy debt/GDP jumped in 2009 as a consequence of the crisis, then again in 2012/13. Cause was mainly the fall in GDP. Governments haven’t been overspending, but there was only a tiny growth.
    The possible depressing effects of Target 2 imbalances on growth were underestimated and not addressed. The comparative advantage principles developed by Ricardo do not hold where the factors of production are internationally mobile.
    Unemployment and lackluster growth in a Country, Italy, that is overall running trade surpluses, are maybe caused by global labor arbitrage (a phenomenon described by S. Roach, where one country exploits the labor of another)?
    Lack of fiscal policy?

  27. Romper
    May 22, 2018 at 9:59 am

    Under the Target 2 system, Italy owes approximately 500 billion euros , mostly to Germany. If Italy defaults or crashes out of the Euro system, what will happen to the Target 2 imbalances? Does this mean war?

    • May 22, 2018 at 12:38 pm

      Italy will continue to owe these balances. There is no bankruptcy for countries where they can just get a court to wipe out their debts in a currency they don’t control and cannot print. Countries have to negotiate with creditors. This can be complicated, as Argentina found out. Creditors also take big losses. So if Italy tries to default or leave the euro, it’s going to get very, very complicated for a lot of entities, and that’s why most of these entities, including the new government in Italy, would want to avoid this.

    • Cynic
      May 22, 2018 at 2:02 pm

      European armies are, mostly, a joke.

      We can make an exception, possibly, for France and Britain.

      A war would, therefore, provide a comic opera element for our entertainment which might not be wholly unwelcome.

      I shall be cheering on the Bersaglieri as they sprint to victory…..

  28. Paul Morphy
    May 22, 2018 at 3:02 pm

    Blue in the face saying this.

    Draghi was chief of the Italian Central Bank. His legacy? Banjaxed and an insolvent Italian banking system.

    His legacy as ECB headbottler washer? Banjaxed and insolvent Eurozone banking system.

  29. C Jones
    May 23, 2018 at 1:15 pm

    Draghi will go down in history as the guy who blew up the EUR single handedly with his QE program. Without that the eursceptics would never have been able to come to power in Italy – market discipline would of seen them off.

    Probably whoever was in charge of the ECB during this period would have similarly bent the legal rules and reached the same decision on QE. The fact Draghi is Italian makes it so much worse – it confirms all the northerners suspicions and completely erodes trust.

    The more you see, the more the Brexit decision looks like foresight.

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