No Good Deed Unpaid
Research for Online Investors

by John Dalt

10/25/11

Italy owes $2.6 trillion dollars in sovereign debt, which is 120% of the country’s GDP.  They have to roll over 83 billion euros worth of bonds in the next year and refund a total of 600 billion euro in maturing debt over the next three years.  Italy is the third most indebted country in the world.  Sunday, eurozone leaders asked Prime Minister Silvio Berlusconi to enact an emergency growth plan that includes some austerity measures.

Berlusconi called an emergency session of the cabinet last night.  On the agenda was a recommendation from the European Commission to increase retirement age in Italy to 67 from 65.  The cabinet meeting ended without agreement.  The European Commission wants to approve new EFSF plans and bank write downs of Greek debt on Wednesday.  They told Berlusconi it would all be pointless to protect Italy in financial markets if the government didn’t bring back a plan to grow their economy and cut their deficit spending.  They set a deadline of Wednesday.

Italian newspapers accuse Eurozone leaders of “ridiculing” Italy and opposition politicians commented on Sarkozy’s “sarcastic smile.”  This morning we learn the leaders meeting may not occur because the deal is falling apart.

Berlusconi cannot deliver a new economic plan for Italy.  If he pushes too hard, his government may fall.  That would mean elections and a caretaker government and no chance of reforms.  In this scenario, only a crisis like in Greece would bring the reforms the European Commission is asking for.

That lets the cat out of the bag.  All of the talk of stopping the contagion from spreading is thrown out the window if Italy will not make reforms before the bond vigilantes push interest rates higher on Italy’s sovereign debt.

Germany wants the European Central bank to stop buying bonds in the open market as soon as an expanded EFSF role is approved.  This presents problems because it will take weeks or even months to set up the mechanics of the EFSF to buy bonds, guarantee a portion thereof, and issue bonds to lever their balance sheet.

The European Central Bank has been buying Italian bonds in the open market to push down interest rates since this summer.  In return for the financial support by the ECB, Berlusconi pushed $75 billion worth of austerity measures through the Italian Parliament.  He has not enacted the growth and revenue measures that were promised in exchange for the ECB’s intervention.

No Good Deed goes Unpaid.

“No one has anything to fear about Europe’s third largest economy” Berlusconi said in an email Monday, continuing that Italy has been meeting its “public debt obligations on time; we have a primary surplus stronger than our partners; we will reach a balanced budget in 2013.”

Merkel and Sarkozy have come to realize that Italy, just like Greece, will not make the hard decisions unless there is a noose around their neck.  Of course neither will the U.S.

Tomorrow should be interesting in the world’s markets.  Whether you trade currencies, commodities, equities or bonds; the volatility will reward those on the right side of the trade. Eurozone leaders are scheduled to meet and reveal the “grand plan” the market has been waiting on for the last two weeks.  Italy says no, Germany will not endorse leveraging the EFSF, and not to be left out the Netherlands has raised objections to any increase in their liability without a parliamentary vote.

Hold on.

The current crisis facing the euro is the biggest test Europe has faced for decades, even since the Treaty of Rome was signed in 1957.-- German Chancellor Angela Merkel

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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