The Big Domino -- Italian 10-year Bond Yield Passes 7%

[btattoo]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

EJ also has noted that the US plan is to openly and covertly inflate debt. I wonder whether Germany and France would find this preferable (i.e. allowing the ECB to print). Of course, this hurts them as creditors, but it may be the only way to prevent disintegration of the Euro experiment (which would seem to be a less preferable option).

[we_are_toast]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

The ECB was already buying Italian bonds today, but not enough to keep the yield below 7%. As the blogger from The Economist mentioned, it would probably take an explicit statement of policy rather than behind the scenes purchases to reverse this. And the ECB doesn't have a legal mandate to do so. That said, it's just possible that Mario Draghi might step off the reservation, exceed his mandate, and then dare the Germans to do something about it. However, there's some thought that the ECB has less capacity to intervene than comparable central banks because it isn't backed explicitly by a unified national treasury. Recognizing that this article is written by someone who doesn't think the euro was a good idea, it's worth considering:

Krugman/Fabor and others say the ECB has the ability, and should, start printing. The questions become, how bad will it be with an Italian default? How many European banks will become insolvent and go down? How many CDS's are written on Italian debt and the debt of the banks that will go down with Italy? Does France get dragged down with the European banks? Is there a run on European banks with an Italian default? Do American banks go down with Europe? Does China's real estate market crash along with it's exports? Do the BRICS crash with the rest of the developed world?

I really can't begin to imagine the ECB would stand by and let the world plunge into an unimaginable depression. In the end I have to believe they claim the authority to print how ever many Euros they need, and let the issue be resolved in some court. And we all know that this isn't really a solution and will probably end up with just a different type of disaster, but it'll kick the can down the road for awhile.

[Kadriana]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

Krugman/Fabor and others say the ECB has the ability, and should, start printing. The questions become, how bad will it be with an Italian default? How many European banks will become insolvent and go down? How many CDS's are written on Italian debt and the debt of the banks that will go down with Italy? Does France get dragged down with the European banks? Is there a run on European banks with an Italian default? Do American banks go down with Europe? Does China's real estate market crash along with it's exports? Do the BRICS crash with the rest of the developed world?

I really can't begin to imagine the ECB would stand by and let the world plunge into an unimaginable depression. In the end I have to believe they claim the authority to print how ever many Euros they need, and let the issue be resolved in some court. And we all know that this isn't really a solution and will probably end up with just a different type of disaster, but it'll kick the can down the road for awhile.

Does the ECB have the ability move fast enough to prevent things from falling apart? This problem has been going on for a while and we were talking about contagion risks a year ago. If they decide to print money, don't they have to get approval of all ECB members? Can all the countries vote fast enough to pass something to save the EU?

[Miin]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

EJ also has noted that the US plan is to openly and covertly inflate debt. I wonder whether Germany and France would find this preferable (i.e. allowing the ECB to print). Of course, this hurts them as creditors, but it may be the only way to prevent disintegration of the Euro experiment (which would seem to be a less preferable option).

Germany has told the rest of Europe last week they would only go through with bailing out (Greece) if the ECB DOES NOT PRINT. The ECB will have to step in but this will go straight against the terms of Germany ... and what happens after that is any ones guess.

[astonas]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

Does the ECB have the ability move fast enough to prevent things from falling apart? This problem has been going on for a while and we were talking about contagion risks a year ago. If they decide to print money, don't they have to get approval of all ECB members? Can all the countries vote fast enough to pass something to save the EU?

The following is my understanding of the ECB's decision-making process:

Day-to-day decisions of the ECB are made by the Governing Council in bi-weekly meetings, policy decisions are made by the General Council, which meets quarterly. (Think of it like a corporate shareholder's/board of director's meeting.)

The Governing Council consists of
-> the six members of the Executive Board, plus
-> the governors of the national central banks of the 17 euro area countries.

ECB Structure
ECB Calendar

The General Council, however, could conceivably step in should the Governing Council step too far out of line. This would work a lot like a corporate board convening to make (or ratify, or reverse) a major policy. In this case the votes would be decided based on share ownership. The ownership of the ECB currently is based on the recent economic size of the participants, so big countries like Germany, France and Italy have a lot more votes than smaller ones.

Current capitol basis for a few major players are below:

%Capital NCB
18.9373 Deutsche Bundesbank
14.2212 Banque de France
12.4966 Banca d'Italia
08.3040 Banco de Espańa
03.9882 De Nederlandsche Bank
02.4256 Nationale Bank van België / Banque Nationale de Belgique
01.9649 (Bank of Greece)
01.9417 Österreichische Nationalbank
01.7504 Banco de Portugal
01.2539 Suomen Pankki - Finlands Bank
01.1107 Central Bank of Ireland
00.1790 Eesti Pank
00.1747 Banque centrale du Luxembourg
00.6934 Národná banka Slovenska
00.3288 Banka Slovenije
00.1369 (Central Bank of Cyprus)
00.0632 Bank Ċentrali ta' Malta
69.9705 Total

Non-Euro area:
14.5172 Bank of England
04.8954 Narodowy Bank Polski
02.4645 Banca Naţională a României
02.2582 Sveriges Riksbank
01.4835 Danmarks Nationalbank
01.4472 Česká národní banka
01.3856 Magyar Nemzeti Bank
00.8686 Българска народна банка (Bulgarian National Bank)
00.4256 Lietuvos bankas
00.2837 Latvijas Banka
30.0295 Total

(source: http://en.wikipedia.org/wiki/European_Central_Bank)

Based on the ECB founding documents, the buying of Italian government bonds (or the bonds of any sovereign member state) is not allowed. Technically that would require a vote of the General Council. The Governing Council has already bent the rules somewhat to the extent that it has purchased some Italian bonds, on the auspices that it was providing liquidity, rather than solvency.

How far it can push this obvious lie depends on how angry it makes the General Council members, which could conceivable call an emergency meeting to intervene.

[Miin]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

See post below, forgot to quote post I was reacting to ...

[Miin]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

Does the ECB have the ability move fast enough to prevent things from falling apart? This problem has been going on for a while and we were talking about contagion risks a year ago. If they decide to print money, don't they have to get approval of all ECB members? Can all the countries vote fast enough to pass something to save the EU?

The ECB is independent ... they don't need approval from the countries to print (altough they are not actually allowed to print by their very own statutes)
So following my previous post, Germany can't technically forbid the ECB from printing but Germany can react to it in other ways ... threatening to stop bailing out countries, threatening to leave the euro themselves ...

[Thailandnotes]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

"Simon Derrick, currency strategist at BNY Mellon, said: "We're at the point of asking the question, if I put my money into Italy, am I going to get it back? The fact is, there isn't a safety net." He added that the mood in the City yesterday was reminiscent of Black Wednesday, in September 1992, when the UK crashed out of the European Exchange Rate Mechanism.

"The surge in Italian bond yields was eventually capped by the European Central Bank, which intervened in the markets to buy limited quantities of Italian debt. But analysts say the ECB will eventually have to step up its action, and act as a lender of last resort to bring interest rates down to pre-crisis levels. Sony Kapoor, director of Brussels-based think-tank Re-Define, said: "We may be fairly close to the point where an existential threat to the eurozone, and hence the ECB, is on the horizon. This could easily spiral out of control."

http://www.guardian.co.uk/business/2...rozone-breakup

[charliebrown]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

If one looks on this site, http://www.tradingeconomics.com/, countries with high gross debt and high unemployment
are on the firing line for default. Is high unemployment a proxy for an output gap?,
and high public debt a rough proxy for total indebtness? Seems like countries in trouble have a product (debt / gdp x unemp) of around .1 e.g. 100% debt GDP, 10% unemployment. U.S. is at .081. I ASSSUME we have a little leeway being the reserve currency and having the pre-eminant military. I don't know how much that buys us.

[doom&gloom]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

Germany has told the rest of Europe last week they would only go through with bailing out (Greece) if the ECB DOES NOT PRINT. The ECB will have to step in but this will go straight against the terms of Germany ... and what happens after that is any ones guess.

ask yourself this question: if the EU dissolves, what need is there for an ECB? thus, i figure the ECB prints if for no other reasn than to save themselves.

[c1ue]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

I've been thinking that the dynamic in Europe is very close to what EJ warned about with respect to America's debt and its output gap. EJ said that if the US tipped into recession before it could close its output gap, while continuing to run big deficits, the debt dynamics would get out of hand. Now we have a nascent European recession and weak growth threatening the credit of otherwise solvent core European states like Italy and France, leaving no scope for fiscal stimulus.

I don't know why you think Italy was solvent.

PIIGS - with the second 'I' standing for Italy - has been talked about on iTulip since at least 2009.

http://www.itulip.com/forums/showthr...ng-to-the-hogs

[jpatter666]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

I don't know why you think Italy was solvent.

PIIGS - with the second 'I' standing for Italy - has been talked about on iTulip since at least 2009.

http://www.itulip.com/forums/showthr...ng-to-the-hogs

Italy the country is rich. Most people own their homes outright.

Italy the government is a 1st-class member of the PIIGS.

[*T*]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

Italy the country is rich. Most people own their homes outright.

Italy the government is a 1st-class member of the PIIGS.

Low levels of private debt; people live with their parents until quite late, so less mortgage debt.

Public finances in a mess though.

[we_are_toast]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

Willem Buiter at Citigroup and Huw Pill of Goldman Sachs have done the arithmetic independently, and concluded that the discounted present value of all of the future income which the ECB can earn from investments financed by seigniorage is in the region of E2,000-3,000 billion, compared with the total outstanding value of Italian and Spanish bonds of about E2,700 billion.

The implication of this analysis is that the ECB has more than enough “capital” to underwrite the peripheral bond markets, without this being inflationary in the long run. In a single nation state, it would probably prove irresistible to bring forward some of this capital from the future into the present, and then use it to purchase government bonds to resolve the crisis.
...

U.C. Berkeley economist Brad DeLong reckons there is, but in a very parochial way.

I have been complaining for some time now that Reinhart and Rogoff think that the time is always 1931 and that we are always Austria–that the great fiscal crisis is about to erupt and send us lurching down toward Great Depression II.

Well, right now guess what? The time is 1931, and we are Austria.

The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip.

The Federal Reserve needs to do so now.

http://ftalphaville.ft.com/blog/2011...h-seigniorage/

A short read discussing what the ECB might be able to do.

[nedtheguy]

Re: The Big Domino -- Italian 10-year Bond Yield Passes 7%

redacted