Whats next for the Eurozone ? With Update
With Greece still edging toward the financial abyss despite all the political maturations. Now Italy – as has been predicted – is now hurling toward the inevitable default. Even though Italian prime minister Silvio Berlusconi’s promise to step down. Now Barclays says Italy is finished as well. Courtesy of Zero Hedge.
Euphoria may have returned briefly courtesy of yet another promise for a resignation that will likely not be effectuated for weeks or months, if at all, and already someone has done the math on what the events in the past several days reveal for Italy. That someone is Barcalys, the math is not pretty, and the conclusion is that “Italy is now mathematically beyond point of no return.”
Summary from Barclays Capital inst sales:
1 ) At this point, it seems Italy is now mathematically beyond point of no return
2 ) While reforms are necessary, in and of itself not be enough to prevent crisis
3 ) Reason? Simple math–growth and austerity not enough to offset cost of debt
4 ) On our ests, yields above 5.5% is inflection point where game is over
5 ) The danger:high rates reinforce stability concerns, leading to higher rates
6 ) and deeper conviction of a self sustaining credit event and eventual default
7 ) We think decisions at eurozone summit is step forward but EFSF not adequate
8 ) Time has run out–policy reforms not sufficient to break neg mkt dynamics
9 ) Investors do not have the patience to wait for austerity, growth to work
10 ) And rate of change in negatives not enuff to offset slow drip of positives
11 ) Conclusion: We think ECB needs to step up to the plate, print and buy bonds
12 ) At the moment ECB remains unwilling to be lender last resort on scale needed
13 ) But frankly will have hand forced by market given massive systemic risk
The whole report [PDF] is available here. And now Reuters is reporting that both France an Germany are talking (how seriously I don’t know) about a break up of the Eurozone to contan only them and a few others who are still financially stable.
German and French officials have discussed plans for a radical overhaul of the European Union that would involve setting up a more integrated and potentially smaller euro zone, EU sources say.
“France and Germany have had intense consultations on this issue over the last months, at all levels,” a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions.
“We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don’t want to be part of the club and those who simply cannot be part,” the official said.
French President Nicolas Sarkozy gave some flavor of his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe — the euro zone moving ahead more rapidly than all 27 countries in the EU — was the only model for the future.
Merkel’s Christian Democratic Union party wants to make it possible for European Union members to exit the euro area, Handelsblatt reported in a preview of an article to be published tomorrow, citing unnamed participants in the discussion.
A commission within the party, that is crafting a framework to be presented at a party meeting, has proposed allowing a euro member who doesn’t want to or isn’t able to comply with the common currency rules to leave the euro region without losing membership in the EU, the newspaper said.
Which of course is sending the markets into a nose dive. Especially the financials. Oh well…easy come, easy go. And how does one say “Turn the lights out before you leave.” in Portuguese ?
All of this will naturally throw a major monkey wrench into a lot of peoples economic policies. For starters you can kiss goodby to any thoughts of making the Euro a reserve currency and attempting to solve our deficit problems by having the dollar devalued. This wild ride has just begun and a lot of people will like get tossed off in the process.
Update from The Guardian:
Fears that Europe’s sovereign debt crisis was spiralling out of control have intensified as political chaos in Athens and Rome, and looming recession, created panic on world markets.
Despite Silvio Berlusconi‘s announcement that he would step down as prime minister once austerity measures were pushed through parliament, a collapse of investor confidence in Europe’s third-biggest economy sent interest rates in Italy to the levels that triggered bailouts in Portugal, Greece and Ireland.
Italian bond yields surged through the critical 7% mark, at one point hitting 7.5%, amid concern that the deteriorating situation had moved the crisis into a dangerous new phase.
In Athens talks to appoint a new prime minister to succeed George Papandreou were in deadlock, and will resume on Thursday morning. The Italian president, Giorgio Napolitano, sought to reassure the markets by promising that Berlusconi would be leaving office soon.
Angela Merkel said the situation had become “unpleasant”, and called for euro-members to accelerate plans for closer political integration.
“It is time for a breakthrough to a new Europe,” she said. “Because the world is changing so much, we must be prepared to answer the challenges. That will mean more Europe, not less Europe.”
Looks like it’s gaining speed.