QE Created Dangerous Financial Dependence, Italy Hooked, Withdrawal Next, ECB Warns

“Who will purchase the €275 billion of government debt Italy is to issue in 2019?”

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The ECB, through its army of official mouthpieces, has begun warning of the potentially calamitous consequences for Italian bonds when its QE program comes to an end, which is scheduled to happen at the end of this year.

During a speech in Vienna on Tuesday, Governing Council member Ewald Nowotny pointed out that Italy’s central bank, under the ECB’s guidance, is the biggest buyer of Italian government debt. The Bank of Italy, on behalf of the ECB, has bought up more than €360 billion of multiyear treasury bonds (BTPs) since the QE program was first launched in March 2015.

In fact, the ECB is now virtually the only significant net buyer of Italian bonds left standing. This raises a key question, Nowotny said: With the ECB scheduled to exit the bond market in roughly six weeks time, “who will purchase the roughly €275 billion of government securities Italy is forecast to issue in 2019?”

With foreigners shedding a net €69 billion of Italian government bonds since May, when the right-wing League and anti-establishment 5-Star Movement took the reins of government, and Italian banks in no financial position to expand their already bloated holdings, it is indeed an important question (and one we’ve been asking for well over a year).

According to former Irish central bank governor and ex-member of the ECB’s Governing Council Patrick Honohan, speaking at an event in London, when the ECB’s support is removed, “the yield on Italian government bonds will be much more vulnerable.”

In Brussels, the chair of the Supervisory Board at the ECB, Danièle Nouy, put it even more ominously, telling her audience to “keep [their] fingers crossed” for Italian banks amid fears that the widening spread between Italy and Germany’s 10-year bonds could sow mayhem on their balance sheets. “So far I don’t think the spread has reached a level of serious concern for the banks, but we don’t know what the future will bring,” she said.

Coming from a person whose job is ostensibly to ensure the stability of Europe’s rickety banking system, these are not comforting words. Nor are they meant to be.

The risks are huge. And they keep growing. A rise in Italian bond yields doesn’t just hurt the Italian government; it also hurts Italian banks, which have significant exposure to Italian debt, as Bloomberg reports.

An increase of 100 basis points in the sovereign spread between Italy’s bonds and Germany’s bunds reduces the Common Equity Tier 1 capital of Intesa Sanpaolo SpA and Unicredit SpA, the country’s two largest banks, by 35 basis points, according to a note by Citi Research. For UBI Banka SpA and Banco BPM SpA, two mid-sized lenders, this is larger — standing at 56 and 66 basis points.

Mid-sized Banca Carige last week received a €400-million emergency injection of cash to stay afloat after failing, against the current backdrop, to raise new, much-needed funds on the market. The money was provided by Italy’s interbank deposit guarantee fund (FITD), sparking accusations that Italy’s government was once again gaming the EU’s resolution laws.

Here’s how the operation worked: the FITD, with money stumped up by Italy’s largest, least unhealthy banks, committed to buy €320 million (for now!) of a new tier-2 bond issue, all of which will convert to equity in March. The alternative was to let Carige, with its €25 billion of assets, go down, and run the risk of sparking financial contagion across Italy’s perilously fragile banking system.

But Carige, to all intents and purposes a gone concern even after its latest life-line, is not the only Italian lender struggling to raise capital at semi-affordable rates. Majority state-owned Monte dei Paschi is also having difficulties, as are many smaller Italian banks. The more those banks struggle, the more likely investors are to dump Italian bonds, heaping further pressure on Italian banks.

Perhaps the biggest risk the ECB runs in this latest escalation of tensions with Italy’s populist government is in reminding investors just how much governments in the Eurozone have come to depend on the ECB’s QE program.

But it’s not just Italian bonds that are hooked on QE. In the past three years the ECB has spent €512 billion gobbling up German bonds (current 10-year yield: 0.35%); €416 billion on French bonds (10-year yield: 0.76%); €256 billion on Spanish bonds (1.62%); €114 billion on Dutch bonds (0.52%); €72 billion on Belgian bonds (0.83%); €57 billion on Austrian bonds (0.61%), and €36 billion on Portuguese bonds (1.98%).

As a result of the ECB’s boundless generosity, Euro zone countries have enjoyed record low borrowing costs. They have also been able to issue record amounts of long-dated debt to smoothen out their debt profiles. Most importantly, QE has helped to maintain the essential illusion that the public debt of Eurozone economies has roughly similar risk weights. Once QE comes to an end, that illusion is unlikely to last. By Don Quijones.

In the feverish reshuffling of financial services for a post-Brexit world, London still comes out ahead, but less so. Read… France Chases London’s Gold Market Amid Soft-Brexit Hopes  
 

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  72 comments for “QE Created Dangerous Financial Dependence, Italy Hooked, Withdrawal Next, ECB Warns

  1. GSH
    Nov 22, 2018 at 10:46 am

    Given the disagreement over the Italian 2019 budget deficit, the EU/ECB will try to impose some pain. But it could backfire on them. Ownership of Italian bonds is not limited to Italian banks. But never fear, eventually someone will come along to do “whatever it takes”.

    • phusg
      Nov 23, 2018 at 8:41 am

      > But never fear, eventually someone will come along to do “whatever it takes”.

      And this time it may well be a hawkish ECB president, like Powell seems to be, doing whatever QT is needed to finally put a accurate/market price on risks/assets.

      • Mike
        Nov 23, 2018 at 4:28 pm

        Flattery aside, with fewer foreign buyers pension funds seem to be purchasing US treasuries. Powell cannot fix the huge hole. Their (pensions) need for yield means that as time passes, with stock declines, they will hold greater and greater portions of total US debt.

        I believe that Forbes is correct in computing total US liabilities at over $100 trillion. That means (absent an unlikely tax raise) the US will let inflation gradually reduce its liabilities. Thus, US pensioners will be left like Russian pensioners, with monthly pension payments so low they are ony enough to buy coffee. Due to inadequate inflation adjustments, ditto for social security.

        That will be the huge tragedy of our lives in the US. Powell will help his bankster sponsors only.

    • Pierpaolo Febbo
      Nov 24, 2018 at 8:06 pm

      For many years now, in Italy, we have been cutting services, making us retire later. A liter of diesel costs 1.50 euros for fuel taxes. Old people at work and young people walk or leave. Has the debt decreased? No. We had the QE. They gave money to the banks to finance loans to families. Was it better? No. If we continue to do the things that Europe imposes, we will never grow up. The debt has always risen. So it means that the method does not work.We want to give money to people if they go for refresher courses or to work on a call and put money into the economy. Inflation is firm! you do not buy. Only taxes increase. Do you really believe that we will do like poor Greece? Punishing Italy brings everyone down to hell. Including Europe.

  2. Max Power
    Nov 22, 2018 at 11:05 am

    Bill Blain wrote about this topic recently. His posits that the “solution” will be for Italian banks to continue buying Italian debt with shadow backing from the ECB:

    “…Even as the ECB and EU rant at Italy about budget deficits and demands it sticks to the rules while Italy blusters about leaving the Euro or running a parallel dimension currency, the ECB or one of the resolution vehicles will quietly offer the banks unlimited Long-term Repo facilities at effective zero rates on their BTP positions, because if they don’t then the Italian banking system will disappear in a puff of logic – thus precipitating the end of everything. And, assuming Italy gets downgraded to junk? Assume the ECB will fudge that as well….”

    Source: https://morningporridge.com/the-morning-porridge/f/blains-morning-porridge—nov-21st-2018

    • MooMoo
      Nov 22, 2018 at 9:01 pm

      Be ‘careful’ with Blain. He’s a clown. Widely known as the dumbest person to ever have worked at Bear Sterns, and summarily binned at Bloomberg, where he was a reporter… Blain is a blowhard know-nothing whose career has been marked by failure after failure. He actually used to steal people’s work and pass it off as his own.

  3. Michael
    Nov 22, 2018 at 12:31 pm

    It would seem the collapse of Europe via Italy’s problems or an untidy Brexit would almost ensure that the Fed will go on hold with future rate hikes. Whether the Fed wll also stop reducing their balance sheet is another matter.

    I am reading a growing series of articles that suggest that the Fed is close to done with hiking (Most recently over at Macro-tourist), but I’ve read other pieces from notable economists.

    I find it hard to believe that the Fed will essentially break the markets and the economy as it has in the past. Unlike past cycles there is no genuine ‘restoring force’, that is market elasticity has vanished. GDP growth is now ‘Fed dependent’ and to remove it will erase even the appearance of ‘growth’.

    • Nov 22, 2018 at 12:46 pm

      Michael,

      If you’re counting on a “collapse of Europe,” you better be patient, VERY patient. There may be some countries that will leave the EU, such as the UK, and there may be some counties that will leave the Eurozone and return to their trash-currency or establish a parallel trash-currency, such as Italy or Greece, but both the EU and the euro will stick around for quite a while longer, even if a couple of member states leave.

      • Lisa Murphy
        Nov 22, 2018 at 1:36 pm

        “If you’re counting on a “collapse of Europe” you better be patient, VERY patient.”

        Not so sure about that. I think the whole world is in for a collapse pretty darned soon. The head of the ECB and our own Fed chair have said QE has lost its effectiveness; run its course. So where do we go from here? Maybe we should look for the answers in the cold, hard math.

        • Rowen
          Nov 22, 2018 at 2:15 pm

          Monetary policy to drive economic growth requires an increasing population base, ESPECIALLY in an economy where capital is concentrated. Most demographers say that Italy’s population peaked in 2017, and is expected to decline for many years. Other than via exports, how does a country with population decline pay off existing and future debt?

          Ask any engineer or scientist who deals with growth (oncologist, epidemiologist, etc), and they’re like “duh.” Economists are captured by concentrated capital, so i guess that’s why they don’t see it. This isn’t an interest rate problem. QE just allowed Italy to kick the can down the road.

        • Nicko2
          Nov 22, 2018 at 3:47 pm

          The Global economy may be slowing down in some places, but we’re hardly talking about the apocalypse. Growth will remain strong in developing economies, and after all the EU is getting a military, so no worries.

          Enjoy Turkey day.

        • Mike
          Nov 23, 2018 at 4:37 pm

          Rowen has a point. The US is in similar shape. Our K-12 education system is so that our bad that our fewer qualified wage earners will have same total income reducing effect as a sharp population decline.

          Aside from via inflation, given this problem, how can US get out of over $100_trillion in liabilities per Forbes? Our population is not growing with science and math wage earners.

      • fajensen
        Nov 22, 2018 at 1:44 pm

        …. establish a parallel trash-currency, such as Italy or Greece ….
        I believe that neither country possess the practical and the organising skills to be able to pull off what will be a complex 3-5 years software project on critical, always-on banking systems. They could, maybe, engineer a parallel banking system at great cost* – with the risk that the political winds change while they are building it and funding is pulled.

        It’s clearly a stretch challenge to collect the garbage in Rome!

        *) In Rome, one notice that the Italian shops are all very neat, clean, with well-dressed staff and well maintained inside. The outside often looks like crap indicating that people take very good care of their own things and do not care so much about other peoples things. To me that means that Italians, mentally, will have a quite difficult time building a shared infrastructure of high quality.

        • Max Power
          Nov 22, 2018 at 7:51 pm

          Yeah, you get that impression right off the plane.

          When I first landed in Fiumicino airport about six years ago, as I was exiting immigration I noticed stuff was falling off the ceiling and the walls looked like they hadn’t been painted since the days of the Roman Empire. I really wasn’t sure I was in Western Europe.

          Then you see all of the monumental structures built by their ancestors and you realize civilization can sometimes regress backwards.

      • Gershon
        Nov 22, 2018 at 1:49 pm

        It depends how one defines “collapse,” I suppose. Certainly there are centrifugal forces, such as populism and nationalism, that have the potential to spin out of control and give rise to charlatans playing on people’s fears and discontents. The economic “boom” of the past ten years has been driven almost solely by printing-press QE and binging on cheap credit, which was never going to end well. Social unrest is going to mount as the financial and political elites prescribe “austerity” for the masses while escalating their looting and asset-stripping of same. The social fabric is being stretched to the breaking point, and the current political class seems interested only in securing opportunities for patronage and graft, rather than rising to the challenge of steering their nations and citizens through the coming crisis. Under the circumstances, “collapse” might be a more plausible scenario than we’d like to admit.

        • Dave Chapman
          Nov 28, 2018 at 12:26 pm

          Agree. Elite behavior is an important predictor of collapse, and our “elites” are not very good.

          Who will be around to collect The Jackpot? We’re going to find out, I think.

      • Realist
        Nov 22, 2018 at 5:05 pm

        Comes to mind certain experts that did claim an iminent Greek exit of Euroland a few years back and those very same experts did claim that the Greek then would withdraw all € notes and reissue them overprinted/stamped as some kind of new currency.

        Consider that in case of Greece then exiting Euroland, the circulating € notes would have been the hard currency the populace would have been dependent on with a failing local currency as an alternative. How would the state then have been able to shut down the circulation of euros ?

        Once more an excellent piece by DQ.

      • MooMoo
        Nov 22, 2018 at 9:06 pm

        … umm, by the looks of things… the Euro is just a few steps away from actually being trash. If/When we slide under par, will the Euro still be considered a healthy currency?

        Considering the currency is the EU’s flagship project, that had better not happen.

        • Nov 23, 2018 at 1:00 am

          Last time I checked, one euro was still worth more than one dollar, the way it has been for most of its life :-]

        • safe as milk
          Nov 24, 2018 at 11:06 pm

          it’s not just italy. the ecb has been propping the whole mess up for so long that they have destroyed the european bond market. what happens to the euro when their bonds go “no bid?”

          sorry wolf but i think your normalcy bias is showing. ;-)

    • timbers
      Nov 22, 2018 at 3:12 pm

      Yves Smith at Naked Capitalism has said for some time that a national, sovereign currency MUST first be established for a nation to leave the Euro Union.

      She says that takes about 2-3 years IT work before a national currency can go live.

      That’s why Greece had zero bargaining power with the rabidly anti-working people Euro Union, and why Greece was forced into devastating poverty…which by the way it the ultimate goal of the Euro Union ECB, and the transfer of all wealth to the Ultra Rich so they become more Ultra Rich (the standard neoliberal agenda).

      Italy and Greece returning their “trash currencies” IMO would be fabulously much better – by light years it’s not even close – than the absolutely certain, relentless, grinding into endless eternal poverty and enslavement to the ECB bankers who serve only the Ultra Rich.

      • MooMoo
        Nov 23, 2018 at 2:41 am

        Hey Wolf, I trust that smile at the en means you’re aware that the 1:1 relationships of currencies means nothing.

        to wit: “Last time I checked, one euro was still worth more than one dollar, the way it has been for most of its life :-]”

        You seem to have a true love for the Euro and the EU… its a predilection, perhaps. But one currency with a dozen issuing entities and different debt markets is a ridiculous way to establish a currency. The Euro has failure written on it. In the age of sovereign debt where austerity is demanded for the protection of bondholders (in this case the ECB, as no one else will buy them… ask DQ) the EU is now demanding austerity so that it’s own stupidity in setting up an unsustainable currency is covered.

        The ECB is a collection of economic intellectual idiots… because, actually, they’re all lawyers. The mighty EU which was supposed to bring everyone together is, in fact, tearing the place apart… and their amateur economics will be the reason for the zone’s disintegration. Their threats are hollow… sanctions for Italy (I thought that was reserved for Russia)??? In five years… sanctions for Hungary and Poland…. maybe in five years… its a paper tiger.

        Before long Germany and France will start playing the blame the other game, and that will be it.

        I give the EU 10 years at best before the whole thing is torn to shreds, or fades into global irrelevance with the rise of Asia.

        FYI – capital flows into America from Europe are screaming. Nobody in their right mind, except a German exporter, and little luvvies in London who want their second homes on the continent secured, has any affinity for Brussels.

        • MooMoo
          Nov 23, 2018 at 4:19 am

          “The ECB is a collection …”

          should read… the EU

        • Nov 23, 2018 at 9:19 am

          MooMoo,

          I don’t love the euro or any other currency. Currencies are just currencies. I’m explaining what I think will not happen: the euro will not collapse. There are a lot of people who want the dollar to collapse and they want the euro to collapse and they want everything to collapse. That’s what they want, or at least it’s fun to write about and read about. But if you actually put your money on it, it’s good to be realistic.

          Clearly, the structural setup of the Eurozone — as you and many others correctly point out — is not good (currency union without fiscal union). But this can work. It just requires a huge amount of discipline that the politicians in some members states clearly do not want to stick to.

          There is a huge difference between the Eurozone losing some member states and the value of the euro collapsing (against the dollar). The first may happen, the second won’t. As an investor, that’s a distinction I have to make.

          Currencies will fluctuate in their relative value to each other, and inflation will whittle down their purchasing power more or less quickly. That’s a given. The euro is also in this category. But it won’t “collapse.”

          If I had data indicating that the second largest currency in the world were about to collapse, I would have to totally change my investment outlook on everything. I would have to assume a fetal position and wait till it’s over. But the data says, it’s not going to happen.

        • Dave Chapman
          Nov 28, 2018 at 12:38 pm

          Disagree. The Euro is not likely to collapse.

          I friend of mine was (briefly) a Floor Trader are the Chicago FX exchange. He told me that the important thing to know about foreign currencies is that many of the players “are not economically motivated”.

          The Euro, like the EU, is not about economics; it is about politics. The purpose of the EU is to have everybody get used to each other and maybe develop some mutual respect and maybe learn to sing Kumbaya, or something.

          The purpose of the Euro is to not have another World War. That is why they really will do “whatever it takes” to hold the teetering mess together. Failure of the Euro project might kill a lot of Europeans.

      • fajensen
        Nov 23, 2018 at 3:27 am

        Sorry, but, I am an old fart.

        I remember the Drachma, the Lira, the constantly recurring debt crisis circuses. Interests of 10-25%. How both Greece and Italy used to be very cheap places to go on vacation in for the adventurous traveller, but, countries where nothing was actually working properly and nobody would be speaking any languages other than their own. I believe that package travel was invented as a work-around, an interface, between the normal tourist and the incomprehensible failure and strangeness of Spain, Greece and Italy.

        Today, one can procure decent engineering and machinery from both Italy and Greece (Spain and Portugal too), all the young people speak at least one other language and in general the standards of living are much higher than they were.

        I don’t think anyone in Greece or Italy truly wants to go back to the life of their grandparents. Of course they’d like to go back to the good parts, but, they will not be very happy with the whole package. That is why they kept the EUR in the end.

        Also, one should bear in mind that much of the “Frictionless Markets Only, Zero ‘Socialism'” neoliberalist fundamentalism actually came about from the persistent and strenuous efforts of the UK, which has now done the EU and us the great favour of taking itself out of the equation entirely.

        Now the main EU battles will be between whatever is the French from of statecraft (I am uniformed here), and the German Ordoliberalism.

        I think the Germans and the French will works something out. And without the UK to sabotage and block, the “Social Dimension” will come back onto the EU agenda. Which I totally think is necessary.

        • MooMoo
          Nov 23, 2018 at 9:45 am

          Ah Wolf man,

          “Putting your money it” has been pretty good for the past decade…in terms of shorting the Euro. When a major currency gets hit for 35%+ in a decade, that can be enough to cause a monetary reset.

          But maybe its a thing with terminology. If the Euro goes to .90 vs. the USD… well I call that a collapse…considering a 1.60 high. When you start to talk about a currency the size of the euro halving, I call that a collapse.

          Also currencies are more important than you are giving credit for. They are in fact the common stock of a nations worth, as many great currency traders have said. Their value is not as benign as you express.

        • Atu
          Nov 23, 2018 at 4:33 pm

          People don’t place their money when their country is in Eurozone, they live under its regime.

          The idea that “Euro could work” is confused , because you are not talking currency in reality, but politics.

          Examples given of countries going back to hard economic reality of the past are false. Without Euro these countries “would have been” as well or better off than they are under Euro now. To leave they will be set back obviously, that price is their choice.

          That Euro is stable because data says so is wrong. You might be right, but data won’t warn you of political destruction of the currency. Policy is what counts re. Euro, in a fast disorderly exit the Euro becomes worthless overnight, vast amounts of credit defaulted on with one spoken sentence, or one vote.

        • Buckaroo Banzai
          Nov 25, 2018 at 10:14 am

          “I don’t think anyone in Greece or Italy truly wants to go back to the life of their grandparents. Of course they’d like to go back to the good parts, but, they will not be very happy with the whole package. That is why they kept the EUR in the end.”

          In the late 1990s, Italy’s economy was doing just fine using the Lira. It should never have dropped its own currency. Once it started using the Euro, the Italians enjoyed an artificial boost, but Italian industry got hollowed out and now the country is a shell of what it was twenty years ago.

  4. Gershon
    Nov 22, 2018 at 1:38 pm

    We will not have honest markets or sound money until the Keynesian fraudsters at the central banks are standing in shackles and orange jumpsuits before honest judges at post-collapse tribunals.

  5. Howard Fritz
    Nov 22, 2018 at 1:57 pm

    Happy Thanksgiving everyone lets just be thankful noting too bad has happened yet…

    • sunny129
      Nov 22, 2018 at 7:17 pm

      Have you asked the American Natives’ if any one or their kind lives around you?

      • Howard Fritz
        Nov 22, 2018 at 9:03 pm

        My grandfather was a native American albeit I knew very little of him, as tragic as the genocide against natives was, what was the alternative never coming over to the new world and letting the natives live in their own nature preserve? Terrible things happen its best we all learn to move past them.

  6. Javert Chip
    Nov 22, 2018 at 2:00 pm

    The EU pretends to be blind to risk, continuing to kick the can down the road. All the financial engineering trick are being used, which essentially means the system continues to deteriorate as all the “wiggle room” is sucked out of any reasonable possible solution.

    The EU could soon be faced with having to generate stunningly high inflation to erode the value of accumulated EU soverign debt, at which point in time Germany may feel the need to “Grexit” as the rest of these so-called “advanced Western countries” settle into genteel poverty (like Greece).

    • Howard Fritz
      Nov 22, 2018 at 9:04 pm

      That sounds like a recipe to destabilize large swatches of the world.

    • MooMoo
      Nov 23, 2018 at 4:21 am

      “It” will happen through a monetary reset…

      It’s coming… and it is going to hurt like hell.

  7. Rowen
    Nov 22, 2018 at 2:07 pm

    If this were the 1930s, this would be the kind of event that would lead a nationalists to march into Brussels?

  8. Gershon
    Nov 22, 2018 at 2:14 pm

    I am reading a growing series of articles that suggest that the Fed is close to done with hiking (Most recently over at Macro-tourist), but I’ve read other pieces from notable economists.

    Michael, I’m seeing those articles as well. However, we, the Great Unwashed, have no way of knowing if Jerome Powell is going to go wobbly on rate hikes, or press on with trying to restore the Fed’s shattered credibility as a responsible central bank following two Fed chairs whose Keynesian lunacy blew the biggest bubbles in human history, while further widening wealth inequality between the oligarchs who were the prime beneficiaries of the Fed’s deranged money printing and the 99% who saw the value of their dollars relentlessly debased by ten years of funny-money “stimulus.”

    Certainly those who benefited from the Bernanke-Yellen “No Billionaire Left Behind” monetary policies want the party to continue. But the savers and responsible who got bilked out of billions in interest income, or priced out of the housing market due to Housing Bubble 2.0, and who have seen the purchasing power of their savings and earnings relentlessly eroded by the Fed’s counterfeiting racket known as QE, would rather see the Fed start acting like a responsible central bank instead of adjuncts and accomplices of the Wall Street investment banks and mega-speculators.

    • Ididsa32
      Nov 23, 2018 at 12:12 pm

      @Gershon

      Well said. It’s unfortunate. Who would have known that the farce would continue for 10 years.

      We now live in an age of entitlement. Equity investors feel entitled to a generous dose of monetary stimulus at the drop of a pin. It’s completely incomprehensible that the correction that’s occurred so far is deemed worthy of a another bailout. 10 years of a gratuitous bubble will do that to investor psychology.

      I don’t think anyone realizes just how far up the ladder the equity indices have risen, and how statistically anomalous these gargantuan returns have been. We all benefited from this, but enough is enough.

      Many of those articles are propagated by people with biased interests of their own.

      The sad part is, there’s not much FFR interest rate latitude to work with, and entropy is having its deleterious effects on QE. And more disturbingly, this a a global phenomenon. Both tools have been abused and are becoming increasingly impotent over time……

  9. Old Codger
    Nov 22, 2018 at 2:22 pm

    The music will stop soon, and someone has stolen all the chairs.

  10. Kye Goodwin
    Nov 22, 2018 at 2:45 pm

    There are very important reasons why sovereign countries usually have their own currencies. Around the world and back through history exceptions to this rule are rare. The Euro zone is a radical experiment with breaking this rule, one that isn’t working out very well.

    Give up your currency and suddenly you are not living in a sovereign country anymore, but instead in a province in someone else’s country. In this case its a country where the central government does nothing for the weaker regions. Economists warned that this would happen, that the common currency would accumulate in the stronger economies and mechanisms to rebalance would have to be put in place. Having the ECB buy all of Europe’s sovereign bonds is an improvised solution to a problem not anticipated by the Eurocrats and it can’t last long.

    Europe has a choice between becoming a real country, where the richer parts help the poorer, or if not, then giving up the common currency experiment.

    • Realist
      Nov 22, 2018 at 5:09 pm

      After all, is it so radical ? Compare to the USA, a set of different states with diverse economies, some in the deep do-do like Illinos and all states depenent upon a currency they themselves do not issue. The difference is that the currency union in the USA has been on the job for a longer time than Euroland.

      • Javert Chip
        Nov 22, 2018 at 6:05 pm

        Well there are a couple significant differences:

        o Almost everybody in the US speaks the same language
        o Almost everybody in the US has a fairly common culture
        o People have been freely moving around the country since it was founded
        o Individual US states haven’t spent the past 1,000+ years fighting with and killing their neighbors
        o People (pilgrims) actually left Europe to get away from Europe and its associated intolerance, incivility and lethality

        Oh yea, and does anybody in, say Spain or Norway, remember voting for Jean-Claude Juncker as “President of the EU? Didn’t think so.

        • EchoDelta
          Nov 24, 2018 at 10:45 pm

          As if the civil war, whiskey rebellion, bleeding Kansas and the Mormos being hounded from NY to Utah never happened.

      • safe as milk
        Nov 24, 2018 at 11:21 pm

        the big difference is the RESERVES. the dollar is backed by u.s. treasuries. the euro is backed by individual member country bonds. this is the fatal flaw of the euro.

    • Cynic
      Nov 23, 2018 at 6:15 am

      ‘Europe’ cannot become a country because it cannot become a nation.

      But it is, or was, a civilization – although a rather fraught and war-torn one.

  11. MC01
    Nov 22, 2018 at 3:59 pm

    I’d like to add a couple of things.

    First, every day the ECB leaves us without at least a tentative plan to monetary normalization is one more wasted day. I am not holding my breath because of how the European economy as a whole has become overdependent on repressed financial conditions, but the past four months have also shown that financial repression doesn’t work anymore.
    We need a clear path to QE Unwind and a sure roadmap to interest rate normalization. Yes, this won’t unwind as well as the US but it’s on our heads because we could have started when the Fed did. We need not merely to tighten, but to tighten faster than the Fed to make up for the lost time, even if this means having less to brag about at G20 meetings.
    Second, don’t think for a second the Italian government is throwing the mother of all temper tantrums to buy medicine for the sick and bread for the needy. This is all a show to ensure the Italian economy keeps on getting plenty of free money to avoid a deep reorganization of the banking sector (meaning a lot of junior bondholders and shareholders will have to eat their losses and a lot of banking executives will have a lot of explaining to do), the liquidation of the enormous amount of bad investments weighing down the Italian economy and putting the obscenely overweight real estate and construction industries on a crash diet… and that voters get low to moderate inflation to boot. I think Americans would say “Having the cake and eating it too”, but Italians would say “Having a drunk wife and a barrel full of wine as well”.

    • Bobber
      Nov 22, 2018 at 5:38 pm

      Italy is right on this. I have a feeling that if the EU cuts off the gravy train, Italy will tighten up their spending real quick-like.

      Sometimes you need pressure to perform, or even want to. The threat of poverty will get them going. The wealthy may even start paying their taxes.

      • MC01
        Nov 23, 2018 at 3:23 am

        “Italy is right on this”… what, the path of profligacy and “let the taps flow” monetary policies? ;-)

        Blaming tax evasion is old game in Italy: I first heard it blamed for the country’s woes in late 1979 or early 1980. It’s always the same: politicians promise too much to an electorate which should know better, politicians have not just to keep their promises but keep on fullfilling those those made before as well, realize their profligate spending is causing budgets to experience severe strain and need a scapegoat, which cannot be themselves, their predecessors or their voters. Enter tax evasion.

      • MooMoo
        Nov 24, 2018 at 11:09 pm

        If the EU, via the ECB, stops buying Italian debt… It is the EU that is going to disappear.

        …and if they keep buying it… they will blow the whole thing up anyway.

        They are trapped.

    • Cynic
      Nov 23, 2018 at 6:11 am

      As a Latin, I’d favour a drunk mistress; but a wife?

      A drunk woman in the kitchen would be very disagreeable and unproductive, although a French girlfriend did perform wonders of one-handed cooking while never being seen without wine glass and cigarette.

      • MC01
        Nov 23, 2018 at 6:48 am

        The Italian original is “moglie ubriaca”, which leaves no room to wiggle in the translation: “moglie” means wife, épouse, esposa etc and that’s final.
        My dreams are still haunted by what happened at the lycée if you took too many liberties with translations: my English teacher was downright terrifying.

        • Cynic
          Nov 23, 2018 at 1:15 pm

          As precise as ever, MC01.

  12. Laughing Eagle
    Nov 22, 2018 at 6:00 pm

    ECB will buy Italian bonds under a economic control plan like they forced on Greece. This way the ECB is in control.
    With all the fear mongering info about a Brexit the ECB will not allow Italy to fail.
    Right now it just fears to the populace.

    • MC01
      Nov 23, 2018 at 4:27 am

      People making this kind of assumptions don’t realize several things.

      First, there’s a growing power vacuum inside the symbiotic EU-ECB relationship. Mario Draghi and several other ECB high officials will finally leave their posts in 2019, and the political struggle to replace them has a far from certain outcome. On top of this Chancellor Merkel has already announced her retirement from politics and Europe’s next big thing, President Macron of France, has turned out to be the political version of a Christmas cracker: one massively disappointing bang and the novelty’s already over. Until we know who’ll call the shots it’s impossible to even take an educated guess about future EMU monetary policies.
      Second, the financial repression which caused Europe’s economy to balloon in 2017 has already run its course, leaving in its wake a huge number of asset bubbles which will need to be tackled, chief among which are sovereign securities. We can do this the Fed way, meaning take a calculated risk and let air hiss out of the system a little at a time, or the China way, meaning frantically reinflate asset bubbles as soon as they show any sign of deflation, keep on “adjusting” every economic parameter you can think of to fool outside observers and hope for the best.
      Third, European banks (and their bondholders and shareholders) need to be taught a lesson, otherwise they’ll never really change: see perpetually scandal-plagued Deutsche Bank and Italian banks lending money to financially unsustainable enterprises for purely political reasons like this is 2006.
      You don’t need to tar and feather people and drag them through the city streets for small children to laugh at them, albeit I admit it would be pretty rad. Just stop considering banks “special” entities and let bankruptcy courts do their job. Let a couple smaller ones go through proper debt restructuring or take the books to court. Let bank shareholders and junior bondholders beat their pans as much as they want. If they feel they have been defrauded in any way they can always sue bank executives and regulators for sleeping on the job. Nasty but that’s how things are supposed to work.

  13. Kye Goodwin
    Nov 22, 2018 at 6:19 pm

    Realist, So glad you posted that reply, because if I’d written one more sentence it would have been about the difference between a real country like the USA and Euroland. Mississippi is the poorest state in the USA and Greece the poorest country in Europe, but imagine how much poorer Mississippi would be if the federal government spent no money there…no post office, no interstate infrastructure, no defence plants, no food stamps, etcetera. Europe has no central government to help Greece, it has just enough government to punish Greece. Its not a union that’s going to last unless something basic changes.

    Another way to put this that I’ve seen: You can’t have a currency union without a fiscal union.

    • MooMoo
      Nov 24, 2018 at 11:13 pm

      Or you might say…. it has just enough government to demand austerity so that bondholders get paid and take no risk ever again.

  14. sunny129
    Nov 22, 2018 at 7:23 pm

    Either way whatever happens to Italy, Brexit or the Europe, assetts bubble is slowly leaking! The great REST has begun with clock running towads the Mean(And then some under!) as it should be!

    Get prepared and don’t get caught like those in 2007-’08

  15. Paul Morphy
    Nov 22, 2018 at 7:57 pm

    The only buyer of Italian bonds is the European Central Bank (ECB) and/or ECB agents.

    Acquiring additional debt to settle legacy debt can only work when the newly acquired debt cost cheaper than the cost of legacy debt.

    Therefore, even if the ECB had the will to get out of the sovereign bond buying malarkey, the Eurozone system would need require some other entity to continue buying Eurozone country’s sovereign bonds. And as there are no other entity willing to step in to the breech………the ECB remains hogtied.

    On the issue of the longevity of the European Union? I don’t doubt for one second the determination of the “European project” to try to stay the course. Juncker, Blair, Brown, Mitterand, Sutherland, Merkel etc, are politicians bought and paid for. They betrayed their own country’s immediate future, on the altar of being “European”.

    There is serious discord with how the European Economic community has become the European Union, and anger at how sovereign nations have become vassals for European hegemony. Secessionist movements have developed across most European Union member nations.
    These movements will not be going away in the short term.

    Eventually we will cease a confrontation between those seeking to remain in the Union, and those who seek to leave the Union, across most if not all member states.

  16. R cohn
    Nov 22, 2018 at 9:02 pm

    Who owns the most Italian debt?
    First the ECB.
    Then the Italian banks
    Then the French banks

    If the ECB fails to buy more Italian debt, then the Italian banks and the French banks will default.This will cause a run on other banks in the EuroZone

  17. nick kelly
    Nov 22, 2018 at 9:53 pm

    The question at the top of the article: ‘Who will buy 275 K euros of govt debt …?’
    Could be boiled down to: ‘who will give the Italian govt 275 K euros?’

    There is no investment in economic production here. The populist govt got elected by promises of goodies it doesn’t have.

    The donor is never going to get the money back. Worse, like feeding stray cats, the populist shakedown will be seen to have worked. The behavior will be rewarded.

    The model for the ECB here should be the reaction of the troika to the
    Greek grandstand play: ‘We’re going to have a referendum to see whether we need to meet your loan conditions.’
    Troika: ‘OK. Let us know. Meantime no more money’

    HOLY SH&T!

    Suddenly there is no cash in the cash machines. The Red Cross is scrambling to line up supplies of insulin, which like almost everything, Greece doesn’t produce. A number of suppliers agreed to supply on credit. Swiss giant CIBA: cash.

    Welcome to reality.

  18. KPL
    Nov 23, 2018 at 2:43 am

    Let us see what rabbits Mario “Do whatever it takes” Draghi will pull out of his hat this time around. EU and ECB are not going to watch the Euro fall apart from the sidelines. So we can expect a version of 2012 in 2019. After all, as Juncker said “when it gets serious, you have to lie”

  19. Rob73
    Nov 23, 2018 at 3:54 am

    ECB through their QE policies have managed to paint themselves totally into a corner.
    I’d like to see if the Fed under Powell will continue on their chosen path. If they do, it will only aggravate the monetary union’s problems.

    Regarding Italy, my friends from Milano tell me it’s all about timing. The current coalition of M5S and the League are basically going all in on a big change of the EU parlement in May 2019. They expect a large increase of far left and far right populists. It will be a rocky 2019 for the old continent.

  20. Frank Klevenhaus
    Nov 23, 2018 at 9:18 am

    I think it was Janet Yellen who said:
    ” The retreat from QE should be as boring as seeing wet paint dry up”.

    What is the state of the paint? Both in the US and in the Eurozone?

    • Gershon
      Nov 23, 2018 at 9:33 am

      Yellen also said recently that there would be no new financial crisis in “our” time. Someone better go check on the old girl’s vitals.

      Of course, given the Fed’s epic incompetence when it comes to economic prognostication, that probably means we should be stockpiling canned goods and emergency preparedness supplies.

      • Bobber
        Nov 23, 2018 at 12:02 pm

        There was an event where Yellen was on the podium and began babbling incoherently for quite a while. They blamed it on the heat, but I have my doubts. Of course, Wall Street and the media didn’t really cover it that much. There’s nothing but market downside to that.

  21. R Davis
    Nov 23, 2018 at 10:18 am

    Isn’t Italy throwing a pebble into the middle of the pond ??

  22. Bobber
    Nov 23, 2018 at 4:21 pm

    Italy is just a symptom of a much larger EU debt problem.

    If you aggregate the European big banks including DB, CS, BCS, CRARY, SCGLY, and BNPQY, you get total assets of about $8.2 trillion. The capital (say book value) of these same banks is only about $290B, so the book value is only about 3.5% of assets.

    If the $8.2T of assets are written down just 3.5% (or $290B), all these banks are essentially insolvent.

    No wonder Mario Draghi wants to print money and keep asset values artificially propped forever.

    The financial future of Europe will be very interesting over the next few months and years. Once that super thin equity cushion vanishes in the next recession, we could see bank bondholders and maybe even depositors lose their money. People may be restricted from accessing their money. Banks and bank regulators may refuse to mark down debt (in an attempt to hide the problem. They are likely doing this now, given the equity of these banks is trading at about 60% of book value on average.

    Or, maybe the ECB prints a bunch of Euros and gives it directly to the banks through shadow maneuvers. Whatever the fix, it’s going to lead to a major reset of expectations and perceived wealth.

    Simply put, there is way too much debt out there right now. Lots of people are holding assets that aren’t worth anything close to current market prices.

  23. raxadian
    Nov 23, 2018 at 7:50 pm

    The “Cheap Debt Bubble” (Because not only the term everything bubble is not right, all those bubbles only happened because they could get debt really cheap) is deflating.

    So companies and cointries will have to sink, swim or float!

    Italy can’t swim, but can it float?

    Will they be forced into draconians measures?

    We will have to wait and see.

  24. Andy Marino
    Nov 23, 2018 at 8:09 pm

    This renders Brexit moot. My line was always that the UK should sit still and await the implosion of the EU, rather than risk casting ourselves as the villains who could be blamed for toppling the edifice by leaving it.

    With an elongated Brexit now being discussed, it could still transpire that the EU is defunct before the UK actually leaves it.

    I love Europe and I look forward to the day when the EU is destroyed, sovereignty to all countries is restored, and the European Community is re-established – or snatched back from the megalomaniacs and (ex-) Maoists who hijacked it in 1992.

  25. d
    Nov 24, 2018 at 4:00 am

    The Italian administration is play chicken with the Eu. Particularly the ECB.

    I believe the Italians have not considered fully, 1 change, since Greece.

    BAIL IN.

    The Eurotrash in Brussels, has shown it is willing to impoverish the population of a State, over State Debt’s.

    Italy considers itself, above this treatment.

    The Eurotrash in Brussels, will not.

  26. Mike Earussi
    Nov 24, 2018 at 6:51 pm

    If the Italian banks and govt collapse financially would the effects be confined to the EU or could it spread to the rest of the world similar to the 1929 Wall Street crash?

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