Markets respond to Euro collapse

Italy May Struggle to Attract Treasury Buyers

Bloomberg,

Nov 10, 2011 4:18 AM GMT+1300

Italy may struggle to sell 5 billion euros ($6.8 billion) of Treasury bills tomorrow, after bond yields surged to euro-era records on Prime Minister Silvio Berlusconi’s resignation offer and LCH Clearnet SA demanded more collateral on the country’s bonds.

Italy auctions one-year bills tomorrow at 11:00 a.m. in Rome, followed by a sale of five-year bonds on Nov. 14. The auction comes after the country’s 10-year bond yield jumped 57 basis points to 7.33 percent, crossing the 7 percent threshold that led Greece, Portugal and Ireland to seek bailouts. Italy paid 3.57 percent the last time it sold one-year bills on Oct. 11. Similar maturity debt currently yields about 8.41 percent.

“At the current yield levels, Italy may have trouble to find buyers in the market,” Alessandro Giansanti, senior interest-rate strategist at ING Groep NV in Amsterdam. “Italy faces only Treasury-bill redemptions until February 2012. We could expect a reduction in the issuance of bonds for the next three months.”

Italian bonds slumped today after LCH, Europe’s largest clearing house, increased the deposit it demands from clients to trade the country’s securities. The decision came hours after Berlusconi lost his parliamentary majority in a key vote and said he would resign once the legislature passed austerity measures pledged to European Union allies to trim the euro- region’s second-biggest debt.

“The LCH decision to increase the margin requirement on Italian debt was clearly unsettling as it represented a milestone on the road trodden previously by euro zone bailout candidates,” said Stephen Lewis, chief economist at Monument Securities Ltd. in London.

Cash Cushion

The Italian Treasury probably has cash reserves of about 35 billion euros, according to Gianluca Ziglio, a London-based interest-rate strategist at UBS AG, which may give the Treasury room to skip auctions later in the year. The sales scheduled for tomorrow and Nov. 14 will likely go ahead, Ziglio said.

“The possibility that the Treasury cancels the auctions tomorrow and Monday is unlikely, because this would be a very negative sign for the market,” he said.

With a debt of 1.9 trillion euros, bigger than that of Greece, Spain, Portugal and Ireland combined, Italy can’t afford to stay out of markets for long. The country faces about 200 billion euros in bond maturities in 2012 and another 108 billion euros of bills. The first bond redemption comes Feb. 1, when Italy must pay back 26 billion euros for debt sold 10 years ago.

The jump in Italian yields is boosting financing costs, which the government estimated in September would be 76.6 billion euros this year, or 4.8 percent of gross domestic product. Prior to today’s surge, rising yields had added another 0.3 percent of GDP to the price tag, according to an estimate by Mizuho International Plc. Open Europe estimated in a note yesterday that the country would face 28 billion euros in additional interest payments in the next three years, wiping out about half the projected budget savings

U.S. Stocks Extend Slide on Euro Concern

Bloomberg,

Nov 10, 2011 9:05 AM GMT+1300

U.S. stocks fell, sending the Standard & Poor’s 500 Index toward its biggest slump since August, on concern nations may exit the European Union after a surge in Italian yields to euro-era records.

Morgan Stanley and Goldman Sachs Group Inc. (GS) dropped at least 7.5 percent, following losses in European lenders, after LCH Clearnet SA raised the extra charge it levies on clients for trading Italian government bonds and index-linked securities. General Motors Co. (GM) tumbled 10 percent after abandoning its target for European results. Adobe Systems Inc. (ADBE) sank 8.2 percent on plans to cut jobs as it lessens its focus on older products.

The S&P 500 slid 3.5 percent to 1,231.49 as of 3:04 p.m. New York time, after rising 1.8 percent over the previous two days. The Dow Jones Industrial Average lost 381.71 points, or 3.1 percent, to 11,788.47. The Stoxx Europe 600 Index decreased 1.7 percent, erasing an earlier advance, as the 10-year Italian note yield topped 7 percent for the first time in the euro era.

For article GO HERE

Italy's debt crisis: 10 reasons to be fearful

The European debt crisis is getting ever more serious, and attention is moving away from Greece to one of the biggest – and potentially most explosive – economies in the world: Italy

the Guardian,

Wednesday 9 November 2011 20.02 GMT

Greece and Italy were the cradles of European culture: now they are threatening to drag the European Union to the grave. While Greece's fiscal woes were worrying, Italy's are monumental. Even Silvio Berlusconi, one of the great political survivors of our age, hasn't escaped this one. The Italian premier is out as the country's debts threaten to take down stock markets around the world. Here are the top 10 reasons to be concerned:

1. Italy is the eighth largest economy in the world and the fourth largest in Europe. Its gross domestic product (GDP) was over $2tn in 2010. Greece, Europe's other basket case, has a GDP of $305bn – an economy about the same size as Dallas, Fort Worth and Arlington in Texas.

2. The country is label-queen heaven – Ferrari, Prada, Armani etc – and a major player in utilities, telecoms and banking. But the recession has put a strain on its economy and a succession of pop-up governments have failed to tackle fundamental problems, including the massive pension debts owed its ageing population. Italy's debts now top $2.2tn, or 120% of gross domestic product.

3. The debt matters because Italy is one of the world's largest markets for government bonds. Fears that Italy cannot pay what it owes on government debt have driven rates on Italian bonds to over 7%. The levels are higher than bond prices reached in Ireland and Portugal before they had to be bailed out.

4. Higher bond rates should, in theory, make Italy more attractive to investors. But what it really indicates is that the country has lost the faith of the markets. It probably doesn't help that Berlusconi pretended to fall asleep during key meetings with European leaders. Credit rating agencies have already cut Italy's credit scores. Moody's said last month it had cut Italy's rating because of a "sustained and non-cyclical erosion of confidence in the wholesale finance environment for euro sovereigns," and said it had the country on watch for more cuts to come.

5. The speed at which government bond crises can escalate is startling: in April 2010, 10-year bond yields in Greece hit 7%; within a month they had reached 12%, prompting Greece's first bailout package. In Ireland, 10-year bond yield hit 7% in November 2010; a month later it had risen above 9%, triggering a bailout. In Portugal, yields hit 7% in November 2010; the bailout came in May.

6. Last month, at the crisis meeting of European leaders, Berlusconi promised wholesale reforms in Italy. His 14-page "letter of intent" included a commitment to raise the pension age to 67 by 2026; steps to make it easier for companies to fire workers; and asset sales and other measures to improve conditions for business. But Berlusconi's sketchy reforms failed to please anyone and met with both a political backlash and business scepticism.

7. "At this point, Italy may be beyond the point of no return," Barclays Capital said in a gloomy report this week. "While reform may be necessary, we doubt that Italian economic reforms alone will be sufficient to rehabilitate the Italian credit and eliminate the possibility of a debilitating confidence crisis that could overwhelm the positive effects of a reform agenda, however well conceived and implemented."

8. Analysts Capital Economics calculate that if Italy's cost of borrowing continues to soar, it will have to raise around €650bn ($880bn) for the next three years or so. If the government also received loans to provide its troubled banking sector with additional capital buffers, the bill could end up being closer to €700bn. Clearly it doesn't have that cash, so it will have to turn to the European financial stability facility (EFSF), the bailout fund that is backed by Euro big boys including Germany, France and – you've guessed it – Italy.

9. The EFSF doesn't have unlimited cash and a multi-year financing programme for Italy would seriously deplete funds. If it can't save Italy, who is next? The European Central Bank (ECB), possibly, but it has been unwilling to step in for fear of "moral hazard" – the risk that euro countries will not make any move to put their accounts in order if they believe a bailout is coming. Economists fear that matters will have to get even worse before the ECB steps in. If Italy has to leave the euro and go back to the lira, the whole eurozone is in jeopardy.

10. US officials keep saying that US banks have little "direct" exposure to Italy. But US institutions have been snapping up credit default swaps (CDSs), insurance against credit losses. The value of guarantees provided by US lenders on government, bank and corporate debt in troubled eurozone countries rose by $80.7bn to $518bn in the first half of this year, according to the Bank of International Settlements. One, admittedly small, firm – MF Global – has already gone belly-up in the US thanks to indirect bets on Europe. If Italy goes down in a disorderly default, it will make the Lehman Brothers collapse feel like a Roman holiday.