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Will Italy’s Implosion Bring Down The EU?

  • Written by Syndicated Publisher No Comments Comments
    November 15, 2011

    So, Italy Sells 5-Year Bonds as Yield Surges to a Eurozone record and the inevitable continues to unfold as nearly all market participants continue to ignore basic arithmetic and common sense. Bloomberg reports:

    Italy sold 3 billion euros ($4 billion) of five-year bonds, the maximum target, at the highest yield in more than 14 years as Mario Monti seeks to form a new government to restore investor confidence in public finances.

    The Rome-based Treasury sold the bonds to yield 6.29 percent, the highest since June 1997 and up from 5.32 percent at the last auction on Oct. 13. Demand was 1.47 times the amount on offer, compared with 1.34 times last month.

    … Monti, 68, accepted a mandate from President Giorgio Napolitano yesterday to succeed Silvio Berlusconi, who resigned as premier on Nov. 12 after defections eroded his parliamentary majority and the country’s 10-year bond yield surged over the 7 percent threshold that promptedGreece, Ireland and Portugal to seek bailouts. The yield on Italy’s benchmark 10-year bond was 6.4 percent at 11:15 a.m. in Rome after the auction, down from a euro-era record of 7.48 percent on Nov. 9.

    Italy was forced to pay 6.087 percent on one-year bills at an auction on Nov. 10, the most in more than 14 years, amid the worsening European debt crisis. Monti, an economist and former adviser to Goldman Sachs Group Inc., will try to reassure investors that Italy can cut a 1.9 trillion-euro debt and spur economic growth that has lagged behind the euro-region average for more than a decade.

    The country faces about 200 billion euros in bond maturities next year, more than twice as much as Spain, which has also seen yields surge on fallout from the debt crisis. The first bond redemption comes on Feb. 1, when Italy must pay back 26 billion euros for debt sold 10 years ago.

    Whoa.. This was hard to see coming, wasn’t it? Yeah, right. BoomBustBlog subscribers reference the explicit warning from early 2010 –Italy public finances projection.

    These severe devaluation in bonds definitely do take their toll, and not just on those who gorged on Grecian debt, as Bloomberg also reports UniCredit Posts a Record $14.5 Billion Loss on Impairments; Shares Tumble:

    UniCredit SpA (UCG), Italy’s biggest bank, posted a record loss of 10.6 billion euros ($14.5 billion) in the third quarter after writing down goodwill on acquisitions and investments.

    The stock fell as much as 9.6 percent as UniCredit unveiled a plan to raise as much as 7.5 billion euros by selling shares. The company took an impairment of 8.7 billion euros as it wrote off goodwill on purchases in Ukraine and Kazakhstan, UniCredit said in a statement today. The bank said it will exit non- strategic units, without elaborating.

    Wider spreads on government bonds contributed to a 285 million-euro trading loss, the company said. The lender also scrapped its dividend for this year and plans 5,200 job cuts through 2015. UniCredit is raising money as it faces the biggest capital shortfall among Italy’s lenders, as ranked by the European Banking Authority last month.

    “Our decision to write down the goodwill of several brands and to raise capital will reinforce the bank from both a balance-sheet and capital point of view,” Chief Executive Officer Federico Ghizzoni told reporters in Milan.

    UniCredit shares were 6.3 percent lower at 77.3 cents as of 3:34 p.m. Milan time.

    The lender said the goodwill charges won’t affect UniCredit’s cash and capital positions. UniCredit’s loan-loss provisions rose to 1.85 billion euros in the quarter from 1.63 billion euros a year earlier. Revenue declined 11 percent to 5.7 billion euros in the quarter.

    The stock sale is part of UniCredit’s new business plan, which targets net income of 6.5 billion euros by 2015.

    Wow! What a surprise… Oh, my mistake… From Subscriber download dated February 2010, Italian Banking Macro-Fundamental Discussion Note, page 7 – Italian banks at risk!

    You see, this is the problem. This Pan-European debacle has been moving in relatively slow motion and was very, very easily foreseeable. As a matter of fact, I have called it with nigh unerring precision from the first quarter of 2010. Reference the series of 40 or so articles starting in January of 2010, together known as Pan-European Sovereign Debt Crisis.

    In The Coming Pan-European Sovereign Debt Crisis, dated Sunday, 07 February 2010 (please take notice of the date), I introduced the crisis and identified it as a pan-European problem, not a localized one. You see, the media and the sell side attempted to make this all about Greece when the reality of the matter was that it was anything but. This is a Pan-European Sovereign Debt Crisis, not a Greek, Irish or even Italian debt crisis. As excerpted:

    Much of the analysis that I have seen fails to put enough weight on the bad loan/NPA issue in each country’s respective banking system, which essentially is the cause of most of the countries’ particular malaise to begin with. I have thrown together a crude, rudimentary chart to put this into perspective…


    When comparing these sovereigns using metrics that encompass more than the usual suspects, you get a clearer picture. The bank bailouts were expensive, arguably too expensive. It may have been better to let them fail in the market and nationalize them. Notice how the nations with the highest NPAs are doing the worst. In addition, one should remain cognizant that the “extend and pretend” game has allowed hundreds of billions of “phantom” NPAs to roam free in each of these countries’ GDPs unrecorded. I believe there may be some surprises left in quite a few of the German banks. We will probably see if I’m right over the next few quarters. See German Recovery Stalls Unexpectedly in Fourth Quarter:German gross domestic product showed no growth in the final quarter of last year, official data showed on Friday, leaving Europe’s largest economy on a weak footing going into 2010.

    And you wonder what happend to Unicredit???

    In the piece What Country is Next in the Coming Pan-European Sovereign Debt Crisis?, dated Tuesday, 09 February 2010 (please take notice of the date) – I illustrated the potential for the domino effect, as excerpted:

    It is beyond a hallucinogenic-induced pipe dream to even consider that the Eurozone will come out of this attempt at replicating the US “extend and pretend” policy intact and unscathed. The mere concept of global equity rallies should have macro traders and fundamental investors chomping at the bit. The US won’t even get away with it, and we have the world’s reserve currency printing press in our basement running with an ink-based, inter-cooled, twin-turbo supercharger strapped on that will make those German engineers green with envy, not to mention green with splattered printer ink as the presses go berserk!

    In part 2 of my series on the Pan-European Sovereign Debt Crisis, we will review Italy and Ireland in comparison to the whipping child of the media – Greece (see “The Coming Pan-European Sovereign Debt Crisis” for part one covering Greece and Spain along with tear sheets for the Spanish banks at risk for subscribers).

    Click to enlarge…


    As seen above, Italy’s gross debt as a % of GDP is worse than that of Greeces. Spain’s stuctural balance is nearly as bad as Greece’s and their GDP is heading backwards at a faster rate than Greece. Spain’s high unemployment trumps all in the comparison, with Ireland coming a close second. Despite all of this, Greece has two to three times the CDS spread. Greece is a dress rehearsal for sovereign debt failure in several larger countries. Ireland is in very bad shape, and the UK is heavily levered into Ireland through the banking system and bonds (to the tune of $190 billion+) which exacerbates the issues that the UK already has (we will get to this in a future post). Spain and Italy combined are a sizeable chunk of the entire EU, and they are at risk. I say this just to keep things in perspective. We still have at least 9 or 10 more nations to review, and it doesn’t necessarily get any better from here.

    The worst has yet to come. With nearly all of Europe’s banking system in the toilet, and roughly half a trillion Euros of mortgage loans coming due for rollover on a property market that is currently underwater with increasing vacancies, softening rents and a fukked macro outlook, pray tell what do you think will come of it?

    Reggie Middleton Featured in Property EU, one of Europes leading real estate publicatios

    Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

    Of course, you can bet the farm on the industry group that will be hit second hardest by all of this, and yet somehow has not recieved nearly enough attention. Stay tuned, collapses commencing shortly. BoomBustBlog subscribers should hit the professional (professional only) addendum to the (all paying subscribersicon Sovereign Debt Exposure of European Debt Exposed Industry (439.61 kB 2010-05-19 01:56:52) which can be found online here: Sovereign Debt Exposure Worksheets – Professional. I will be updating this list within a week.

    Images: Flickr (licence/attribution)

    About The Author

    Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts to uncover truths, seldom if, ever published in the mainstream media or Wall Street analysts reports. Since the inception of his BoomBustBlog, he has established an outstanding track record


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