http://www.infowars.com/in-greece-as-austerity-ignites-masses-elites-turn-to-imperial-stormtroopers/

In Greece: As ‘Austerity’ Ignites Masses, Elites Turn To Imperial Stormtroopers

Daniel McAdams
Lew Rockwell Blog
Feb 27, 2013

The usually reserved waitress at our favorite Greek-owned Sunday breakfast place approached us in dismay. Her daughter and son-in-law were escaping Greece for the US. Even middle class professionals were finding themselves digging in the garbage for food to eat, she said. You cannot imagine just how bad it is in Greece, she told us, with tears in her usually stoic eyes.

What has happened in Greece is as Ryan McMacken quotes Mark Thornton in a recent LRC blog, about what passes in popular parlance as “austerity”: “The…idea of raising taxes on individuals to pay off international banksters…[which] is bad economics and is not real austerity.”

As the always enlightening Daily Bell website pointed out earlier this year:

“In fact, the Greek Parliament is voting today on a new tax bill that broadens the tax base to raise another 2.5 billion euros, and also introduces new annual income thresholds for salaried taxpayers. It does away with tax breaks for the self-employed.

“Entrepreneurs have emerged as the latest ‘bandits’ in Greece’s ongoing efforts to bleed the wretched Greek carcass of its last available drop of revenue. Government benefits have been slashed, taxes raised and Greeks are being pursued with maniacal determination for taxes, paid or not.”

But, the Daily Bell notes, this austerity does not apply to the elites:

“Not long ago it emerged that the IMF had in its possession a list of top Greek pols and other officials who had illegal Swiss bank accounts. …The IMF handed over the list to the Greek government, which promptly sat on it.”

Squeezed to the point of total economic and psychological collapse, Greeks are responding with desperate measures to the domestic and international elites who have destroyed their country: they are getting restless and violent. There have been more than a dozen armed incidents in the past couple of weeks and matters look to get far worse.

Former Greek career diplomat Leonidas Chrysanthopoulos is quoted in the New Statesman this weekwarning about the chilling turn in Greece — and an even more chilling government response:

“’It is an escalation of activities,’ he worries, adding that he expects the ‘explosion’ to occur sooner rather than later. He predicts the spark will be when new, retroactive and sizeable tax bills come due in the coming months that people simply cannot pay. ‘There will be further increases in armed actions. There will be bloody demonstrations.’”

Greece is about to turn on its own people but to continue the transnational elite’s “austerity” measures the Greek government needs to use some of that elite’s muscle:

“Chrysanthopoulos says that the government has hired Blackwater, the American private military firm infamous for its activities in Iraq, which now goes by the name ‘Academi’, along with five other international for-profit security outfits. Explaining why this has happened, he says bluntly: ‘The Greek government does not trust the police whose salaries have also been cut.’

Coming soon to the US?

and.....

http://globaleconomicanalysis.blogspot.com/2013/02/france-unemployment-highest-since-1997.html

Wednesday, February 27, 2013 1:53 AM

France Unemployment Highest Since 1997

In the easy to see coming category (thanks to the socialist policies of French president Francois Hollande) French unemployment level hits 15-year high.

Unemployment numbers in France rose by 43,000 in January to 3.16 million, an increase of 10.7 percent from last year, the labour ministry revealed on Tuesday. The figure is at its highest since January 1997, when it reached 3.19 million.

Rising unemployment is a setback for Socialist President Francois Hollande, who has pledged to curb the unemployment rate from the current level of more than 10 percent to a single-digit figure by December.

But mounting economic problems have already forced Hollande to abandon a goal to reduce the fiscal deficit to 3 percent in line with European Union norms after slashing this year's growth forecast.

His government is struggling with weak growth, poor competitiveness, thousands of layoffs and general economic gloom.

This is going to be a bleak year for Europe, with France leading the way.

Mike "Mish" Shedlock

and.....

http://www.bloomberg.com/news/2013-02-27/monti-government-said-to-consider-delaying-monte-paschi-bailout.html

Monti Government Mulls Delaying Monte Paschi Bailout

By Elisa Martinuzzi & Sonia Sirletti - Feb 27, 2013 5:30 AM ET

Mario Monti’s caretaker government is considering postponing a 3.9 billion-euro ($5.1 billion) bailout for Banca Monte dei Paschi di Siena SpA, leaving the final decision on the payout to the next government, two people familiar with the discussions said.

According to the decree approved by Monti’s cabinet in December, the payment is set to be completed by March 1. Under the government’s rescue plan, Monte Paschi will sell securities, dubbed “Monti” bonds, to the government with a 9 percent coupon that may rise to as much as 15 percent.

Enlarge image

Monti Government Said to Consider Delaying Monte Paschi Bailout

Pedestrians shelter from the rain beneath umbrellas as they pass the headquarters of Banca Monte dei Paschi di Siena SpA in Piazza Salimbeni in Siena. Photographer Alessia Pierdomenico/Bloomberg

Italy's `Way Out' Must Include Spending Cuts

5:43

Feb. 27 (Bloomberg) -- Italian Senate Finance Committee President Mario Baldassarri talks about the country's inconclusive parliamentary election results. He speaks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

A decision whether to go ahead with the capital injection may be made as soon as today, said one of the people, who asked not to be identified because the talks are private. Government and Monte Paschi officials didn’t answer several phone calls seeking comment. The stockfell as much as 4 percent in Milan trading.

Italian elections this week produced a hung parliament, with comedian Beppe Grillo’s anti-austerity movement winning more than 25 percent of the popular vote, compared with the 10.5 percent of the votes received by Monti’s coalition in the lower house. Grillo opposed the current bailout plan, arguing that a parliamentary commission should investigate the bank’s dealings. A delay may prompt a review of the terms, said Fabrizio Bernardi, a Milan-based analyst at Fidentiis Equities.

‘Strong Opposition’

“Given the composition of the new parliament there could be strong opposition to the current form,” said Bernardi, who has a sell recommendation on the stock.

Monte Paschi (BMPS), engulfed by investigations of its former managers, said on Feb. 6 it will take a 730 million-euro hit to its assets after reviewing structured deals from 2008 and 2009 that hid losses on earlier derivatives. The bank is seeking state funds to boost capital after failing to meet regulators’ minimum requirements in a rescue that some lawmakers and consumer groups have opposed.

Monte Paschi fell 3.6 percent to 20.52 cents by 11:04 a.m. in Milan. The stock is down 30 percent since Bloomberg News reported on Jan. 17 that the bank used a derivatives deal, dubbed Santorini, to disguise losses before a previous government bailout in 2009.

New terms for the current rescue could dilute shareholders should the bank swap existing debt for stock instead of taking on more debt, said Ronny Rehn, an analyst at Keefe, Bruyette & Woods in London.

“A delay raises uncertainty on the kind of bailout it will be offered and the level of potential dilution,” said Rehn.

and.....

http://www.nakedcapitalism.com/2013/02/germans-and-eurocrats-throw-hissy-fits-over-italian-elections.html

WEDNESDAY, FEBRUARY 27, 2013

Germans and Eurocrats Throw Hissy Fits Over Italian Elections

It’s unlikely that the destabilizing of the political calculus in Europe resulting from impressive showing of anti-austerity candidates in Italy will end prettily or nicely. However, Europe had already put itself in the position of having only bad choices. So the question is who suffers, and the public in periphery countries are starting to rebel against being broken on the rack while Eurocrats and pampered German and French bankers feel no pain.

Needless to say, the fact that 57% of Italians who went to the polls Monday have figured out that austerity is not working has been met with condemnation and consternation from Brussels and Germany. The astonishing part about their hectoring is it reflects a real inability to grasp some basic elements of the equation. First, of course, is that austerity is a failed experiment. Even the IMF, which has favored this formula for decades, has been forced to ‘fess up. But the other two thirds of the Troika are so politically and emotionally wedded to tightening the fiscal noose on the periphery countries that they’ve simply dismissed the IMF’s analysis as inconvenient. I suspect the IMF would have gotten a more sympathetic hearing if it blamed the failure of austerity on space aliens rather than fundamental shortcomings.

But the second is that the Eurozone really does not have much leverage over Italy. On the surface, that isn’t obvious, since Italy has €420 billion in financing scheduled for this year, so a rate spike would be painful and costly. But as Ambrose Evans-Pritchard pointed out in the Telegraph:

Yet Italy is big enough to bring down the eurozone if mishandled. It is also the one Club Med country with enough fundamental strengths to leave EMU and devalue, if it concludes that would be the least painful way to restore 35pc of lost competitiveness against Germany since the launch of the euro.

It has low private debt and €9 trillion of private wealth. Its total debt level is 265pc of GDP, lower than in France, Holland, the UK, the US or Japan.

Its budget is near primary balance, and so is its International Investment Position, in contrast to Spain and Portugal. It could in theory return to the lira without facing a funding crisis, and this may be the only way to avoid a crisis if the ECB withdraws support. Any attempt to force Italy to knuckle down risks backfiring disastrously for EMU creditors.

In other words, Italy could credibly exit. But right now, German and EU politicians are reacting badly to this wrenching change in their assumptions, that they held the cards and could impose their will on elected governments. They were confident that if the Bond Gods demanded sacrifices from the public, they’d be made, and pronto too.

Sadly, I don’t read German, but one of my buddies who does says the reactions in the German media were unhinged. From what I can infer from the spillover into the English language media, they seem to be doing a combo of the denial and anger phases of the Kubler-Ross give stages of loss model at once. They honestly seem to think that Berlusconi can be hectored into line. And Grillo is simply derided. Funny how no one acknowledges that he was onto the Pharmalat fraud before even analysts picked it up. He’s untested, but he’s not the fool that the Eurocrats are telling themselves that he is. Underestimating your opposition increases the odds of failure of a countermeasure.
Some of the quotes are priceless. The Der Speigel headline sums it up: World From Berlin: Italy’s ‘Childlike Refusal to Acknowledge Reality. This is an extract from the leading conservative paper Die Welt:

Silvio Berlusconi ruined Italy — a founding member of the European Community — and brought it almost as close to bankruptcy as Greece. One had hoped that he wouldn’t get another chance after a lean but necessary year of reforms under Prime Minister Mario Monti. He probabably won’t get that chance — but he succeeded in at least getting close to the winning Democratic Party. It is worrying that voters didn’t punish this jester by ignoring him.”
In the campaign he promised the abolition of the IMU real estate tax and even the repayment of the taxes already paid under it. The failure to punish such nonsense casts a bad light on a country that requires a fundamental political renewal. If you count the results of the Five Star Movement of the rabid Beppe Grillo, who has been preaching wild hatred of the ‘freeloaders up there,’ then more than half of Italians voted for some form of populist. This amounts to an almost childlike refusal to acknowledge reality.

Funny, this is Berlusconi’s position, per the Telegraph:

“A deal with Monti is impossible,” said Mr Berlusconi on Tuesday. “His austerity policies have put the country into a dangerous recessionary spiral, with rising debt and unemployment, and the closure of a thousand firms a day.”

So who is more reality based here? But you’d never know that reading the German media. This is from Süddeutsche Zeitung:

Now populism, yelling and lies rule Italy once more. In the Greek election dramas of recent years it was the radicals who profited from the crisis. In Italy it has been the populists. They’re radical too in their ways: They deny reality, they pass blame for the misery to enemies outside the country, they witter on about the simple solution to all the problems. Italy won’t get a simple solution after this election. It will get a new election at most. And that wouldn’t be a blessing either.

The Guardian kept track of the official threats on Tuesday. This one ran in Reuters:

“It is important that Italy has a functioning government. Monti’s reform path must be continued,” Michael Grosse-Broemer, parliamentary floor leader of Merkel’s Christian Democrats (CDU), said, in the first German reaction to the election result.

This one as described in the Guardian:

German economy minister Philipp Rösler was putting a brace face on events, saying that he could imagine a better result for the pro-reform parties.
But in a statement, Rösler insisted there was no other way:

There is no alternative to the structural reforms that are already underway and which include consolidating the budget and boosting competitiveness.

Ah, but there are alternatives! As Ambrose-Pritchard noted, Italy could depart the eurozone, and my German-reading colleagues say that there was also discussion of Germany leaving the Eurozone. The German concern is that they are facing open ended rescues of those profligate Latins (which are in reality rescues of those profligate French and German bankers, somehow that part is never included in the equation). But the rescues were destined to continue until Germany addressed its chronic trade surpluses. Trade surpluses entail financing your trade partners. The alternative proposed by economists like Yanis Varoufakis is for Germany to invest heavily in the periphery countries, to increase the wealth of their population and enable them to make products that Germans would buy. It appears the German plan (if there was a plan, I think the Germans have been driven by their desire to avoid embarrassing questions about banks and their emotional attachment to manufacturing dominance and the virtues of saving) was to impose a German diktat on the periphery, which would make their governing apparatus irrelevant (that is pretty much the state of play in Greece) and enable them to acquire assets on the cheap. The problem is, if Greece is the model, is that you destroy so much of the economy that there is not much left worth salvaging. You not only destroy your cheap takeover opportunity, you also destroy your trade partner. Whoops!
The German foreign minister also banged the same empty drum. Again, from the Guardian:

Germany’s foreign minister, Guido Westerwelle, has now weighed in, becoming the third German politician to argue that Italy must stick with Monti’s reform plan.
Speaking in Berlin, Westerwelle said it was important that a stable Italian government is formed quickly – one that is committed to Monti’s policies.

The European Commission was on the surface more reasonable, saying it heard the message of Italian concerns. But it effectively insisted that the beating must continue until morale improves, that Italy needed to reduce its “unsustainable” level of debt and finger-wagged at the dangers of populism. Notice how democratic processes are dismissed as mere “populism”? As if the Italian public does not have a right to self-determination? And notice also the refusal of the technocrats to take any responsibility. There’s not an inkling of “Hey, the results in Italy are so bad, maybe we need to do a bit of course correction.” No, all you read is bullying, dismissal, or faux sympathy combined with thinly-veiled threats.

In fact, the Italian revolt has exposed a grave miscalculation by the Eurocrats, that they would do the bare minimum, only driven by crisis (and those crises were mainly foreseeable, like major bond refinancing dates for wobbly countries). The Greek referendum threat was abruptly shut down, with the help of the betrayal by finance minister Evangelos Venizelos. There’s been a widespread belief that the ECB’s OMT, which calmed the markets last fall, had pretty much solved the Eurozone crisis because periphery bond yields fell and have stayed tolerably low. In fact, this was an astonishing feat of three card Monti. The OMT in fact was a bluster, a mere clever restatement of existing powers and programs. But it has worked longer than Hank Paulson’s July 2008 bazooka did.
But the complacency of the seeming success of the OMT meant the Eurocrats simply failed to move forward with other needed elements of integration. And that in turn reflects fundamental German ambivalence. Germans would also lose critical elements of democratic and economic sovereignity if the European project moves forward, no matter how much they do to cut the pie in their favor.
Now of course, the nay sayers are narrowly correct. Italy will suffer if it bucks the will of its aspiring Eurocrat masters. But it faces pain, certain pain, if it stays with its present path. And there are intangible but important positives to the defiance of the policy elites: outcomes will be uncertain, which if nothing else is more exciting, and some people may come out better off short term. If Italy does ditch the euro, the prospect is for a good deal of short term dislocation, but it could wind up markedly better off longer term. And perhaps most important is self determination and altruistic punishment. People place considerable value on control; the most stressful jobs are ones where workers face both time pressure and little autonomy. And members of social species are willing to inflict punishment to fellows who break the rules, even when it comes at personal cost and appears to yield no personal benefit.
Italian voters have said “Basta” to self-serving politicians and technocrats. These feckless leaders are living examples of Upton Sinclair’s dictum: “It is difficult to get a man to understand something when his living depends on not understanding it.” So expect the two sides to keep talking past each other as this struggle over Italy’s and possibly the Eurozone’s future escalates.

and....

http://www.zerohedge.com/news/2013-02-27/if-you-thought-european-crisis-was-over

If You Thought The European Crisis Was Over...

Submitted by Tyler Durden on 02/27/2013 08:28 -0500

Bond

European Central Bank

France

Germany

Via Mint Partners' Bill Blain,

Today’s big event was Italy's 10 year auction. Buyers can’t ignore yield, and I suspect many were “encouraged” to participate. But a decent Italy auction doesn't change the brutal facts. Electoral fall-out blankets the Euro battlefield, but it was decisions made years ago that have brought us to this blasted heath. Markets are caught in...

Stalemate.

On one side you have the disbelief on the Italy election (although why markets are surprised we cannot fathom) and all that entails about rising uncertainty on the Euro. On the other is the fact buyers need to invest. In the short-term expect the pressure to invest to win out – Italian and peripheral yields will consolidate and even tighten again. Risk off will quickly become Risk-on!

From there it becomes a debate about whether the Italy election was just another minor stumble that can be glossed over, or is it part of a more significant fundamental shift? I suspect market fears, uncertainty, and the global fundamentals will likely see the Euro crisis reveal itself again in four distinct ways in coming months:

The Politics of Austerity

Banks

Sovereigns

Renewed Unwind Fears

Austerity has failed: Listen to the language Bersani is using in Italy: trying to put together an administration based on reform and “easing of austerity”. 5-Star leader Grillo has made clear his anti-austerity convictions. Euro Elites must be having conniptions.

Austerity is the very core of the Euro Elites’ belief structure and anything less is heresy. But, across Europe from Hollande (in France) to Athens the political patience with austerity, and its increasingly apparent failure, is in the air. Austerity has done nothing to improve sovereign finances (actually increasing the imbalances in most cases!), and destroying economies with the resulting high social costs. Self-inflicted recession has not worked. There is no point in clinging to a failed ideology of austerity. The Euro Elites won’t accept that without a struggle.

So Europe needs a plan B – Growth… but a commitment to growth would require a much closer fiscal and monetary union akin to the United States of Europe to avoid moral hazard and free rider risk. It would also require yet another rejig of the ECB. There simply is not the bottom-up political appetite to support any of that. Sure, some of the Euro Elites would love to inflict top down “emergency/crisis” union, but it won’t happen because it would immediately crash against national politics!

If you fancy an academic explanation of failed austerity try this:http://www.voxeu.org/article/panic-driven-austerity-eurozone-and-its-imp...

European Banks remain Rotten to the Core: If austerity has failed economies, it’s singularly failed to address the banking crisis. The US has spent the last 5-years deleveraging and recapitalising its banking system, and that is now paying off with growth in personal and commercial lending, restoring housing markets and seeding growth.

What did Europe do? Debated banker salary caps and the self-immolation of the financial system through a transactions tax! The Elites singularly failed to address bank’s previous fatboy lending practices – they remain essentially over-levered, over-regulated and dangerously exposed to European risk. Every policy response, like long term LTROs or even OMT, was a hasty panicked infusion of liquidity to keep the banks in pretend and extend mode. Draghi did a superb job keeping the illusion going.

But aside from that, all Europe has done to address the banking crisis at its core is make a series of promises about “save the Euro at all costs”. Talk is cheap. And has done nothing to make Europe’s bad banks safer. Instead, they became even more bloated and exposed to Euro risk!

Sovereigns remain in Crisis: The poor South is caught with the wrong currency – uncompetitive, unproductive and unable to deflate to compete. Even Ireland’s status as the poster boy of austerity is bogus – economic growth is largely on the balance sheet of tax sheltering multinationals.

The results of austerity are all too obvious – rising unemployment, social tensions, and electoral dismissal. Although some of the crisis economies have done much to try to restructure and redirect their economies, in the teeth of the Austerity gale it’s proved pretty much impossible. It takes years for economies to become as lethargic as the south has become, and it can’t be turned around overnight.

Renewed Fears for the Euro: The core tenant of belief of the Euro – austerity is failing. There is no easy way to redirect the institutions of the Euro to create growth. The bloated Brussels bureaucracy would be a highly imperfect tool to sponsor European growth – although I am sure they will tell us otherwise.

The ECB’s reluctant acceptance of its de-facto role of lender of last resort is heavily qualified by the need for countries to sign up to austerity prior to ECB OMT support – that is increasingly politically unacceptable in the wake of the Italy election. A new easier OMT will be required with all the national votes and treaty changes that will require.

If you thought the European crisis was over... it’s probably only just beginning. Sure, we may not see bond yields immediately rack back up into the stratosphere, but a period of further political panic and change is coming! What’s done cannot be undone..

And notice, yet again, I never mentioned Germany once in the above analysis.

.

http://www.zerohedge.com/news/2013-02-27/overnight-tensions-eased-italy-sells-5-10-year-bonds

Overnight Tensions Eased As Italy Sells 5, 10 Year Bonds

Submitted by Tyler Durden on 02/27/2013 07:09 -0500

With little on the event calendar in the overnight session, the main news many were looking forward to was Italy's auction of €2.5 billion in 5 and €4 billion in 10 year paper, to see just how big the fallout from the Hung Parliament election was in the primary market. As SocGen explained ahead of the auction: "The target of Italy's 2017 and 2023 BTP auction today is a maximum EUR6.5bn, but in order to get to that tidy amount the Tesoro may be forced to offer a hefty mark-up in yield to compensate investors for the extra risk. Note that Italian 6-month bills were marked up at yesterday's sale from 0.731% to 1.237%. Who knows what premium investors will be asking for today for paper with the kind of duration that is not covered by the ECB OMT (should that be activated)? Will Italian institutions, already long BTPs relative to overall asset size, be forced to hoover up most of the supply?" The outcome was a successful auction which, however, as expected saw yields spike with the 4 year paper pricing at 3.59% compared to 2.95% before, while the 10 Year paper priced some 60 bps wider to the 4.17% in January, yielding 4.83%.

The result was a brief dip in Italian OTR BTP yield, which have since retraced all gains and are once again trading in the 4.90% range on their way to 5%+ as JPM forecast yesterday. And as expected, talk promptly emerged that the auction was pulled by "two large domestic buyers" in other words, the two big local banks merely levered up on Italian paper hoping furiously that they are not the next MF Global.

Continuing with SocGen's recap of the situation on the ground in Italy: "In the meantime, the political situation on the ground is far from being resolved and new elections cannot be ruled out. Before it gets to that, efforts will concentrate on forming a centre left government but that will be easier said than done especially in the upper House. Monti stays in charge until the new government is appointed, but given the conditionality attached to the OMT, it is unclear whether the ECB is still in a position to backstop should the crisis linger on. President Draghi may choose not to comment on the situation in a speech in Bayern today."

In other news, Italy business confidence rose before the Italian election from a revised 88.3 to 88.5, even as the brilliant visionairies at Moody’s said Italy's election is credit negative.

Elsewhere, ECB’s Praet said that accommodative policy could loseeffectiveness:

“I am referring to what used to be known as ‘instrument instability’ in policy-making,” Praet said in a speech in Frankfurt today, according to a copy provided by the ECB. “The need to apply larger and larger doses of the same policy interventions only to see their macroeconomic influence becoming more and more tenuous.”U.K. Q4 GDP shrank 0.3%, or as much as expected, on trade, weak domestic demand, as the BOE is inches away from joining the mega print global reflation attempt.

Oops.

Finally, Commerzbank said it has repaid in full its €6.2 billion from the second LTRO, in the process stigmatizing all other banks who haven't done so.

And the comprehensive recap from DB's Jim Reid:

One can't help wondering whether the Italy election represents a triumph for the notion of democracies or alternatively whether it shows that in an era of incredibly tough choices, such a system is doomed to deliver highly unhelpful outcomes. Maybe in this circumstance much depends on whether you think austerity is a necessary evil or whether you think it’s been an unmitigated disaster. Mr Monti was put in place as a democratic outcome was seen as unlikely to yield the policies designed to keep Italy within the Euro but many believe his policies have helped cause one of the worst recessions in living memory in Italy and it’s not
surprise to see the voter rebellion.

Europe needs to take this rebellion very seriously and maybe think about its policies going forward. If it wants to keep the Euro as a going concern over the years ahead it may need to find a way of easing off on austerity whilst simultaneously finding a way for the ECB to be distributing more non-conditional liquidity. A difficult balance.

Our European economists write that with no workable majority in the Senate, the most likely outcome now is a “caretaker government” which – at best – will come up with a new electoral system. As it currently stands though, the centre-left’s Bersani has indicated that he will at least try to form a government, but without mention as to which political groups he will reach out to. Yesterday Bersani called on all his opponents, including Berlusconi, to back a five-point programme of political reform, easing of austerity and job promotion. Angelino Alfano, of Berlusconi's centre-right People of Liberty party, indicated that weeks of tough negotiations lie ahead before a new government takes office, possibly in late March.

What worries us is that the weeks and possibly months of uncertainty that lay ahead may stifle any confidence within the Italian economy and hold back the recovery. This would be very unwelcome news but it’s a realistic concern if no solid Government can be formed.

On that note, S&P and Moody’s released statements overnight commenting that while there is no change in Italy’s BBB+/Baa2 credit ratings just yet, the elections have underscored that risks to carrying out structural and fiscal reforms are substantial.

In terms of the markets, we had a significant risk-off session in Europe which saw Italian assets underperform while gilts and bunds rallied. 10yr Italian bond yields added another 41bp to close at 4.896% in its weakest one day performance since December 2011. As it stands now, 10yr yields are about 77bp off the January lows but still about 170bp lower than the peaks of summer 2012. Italian equities had a similarly weak day, testing the -5% level early in the session before closing just off the lows (-4.89%). European credit indices were also under pressure with Main (+9bp), Crossover (+34bp) and Financials (+17bp) all gapping wider on solid volumes. Perhaps the outperformer on the day was EURUSD which managed to hold at around 1.306 and finished broadly unchanged.

With this context it was impressive to see the US rally yesterday, especially after Europe closed. US markets hit a bottom just as European markets closed yesterday.

Indeed, the S&P500 was a nursing a loss of -0.2% at the time of the London close, and from there the index added 0.8% to close with a pretty respectable 0.6% gain. Bernanke offered a robust defence of the Fed’s asset purchases before the Senate Banking Committee, reiterating that inflation risks were subdued and that monetary policy was contributing to the economic recovery. Indeed, his defence was so robust that Reuters described it as coming from someone who “doesn’t plan to seek Senate support for a third term” (Reuters). As DB’s Joe LaVorgna characterises it, the bottom line is that Bernanke remains dovish. While Bernanke did not specifically address the question of where he stands on the possible need to taper the rate of monthly QE purchases, there was nothing in his remarks to suggest he is ready to change at this point.

All ten S&P500 industry sectors finished the day higher led by cyclicals and retailers – the latter helped by a 11pt rise in consumer confidence (69.6 vs 58.4 prior and 62.0 expected). Outside of the consumer confidence print, it was a solid day for US data overall with the Case-Shiller index (+0.88% vs +0.65% expected) and new home sales (+15.6%mom vs +3% expected) surprising to the upside while FHFA house prices were in line (+0.6%). Equities were also given a boost by index heavy-weight Apple, which bounced 2.7% off the session lows on reports that the tech-giant could announce a stock split at its upcoming shareholder meeting.

With the positive lead from the US, Asian markets are trading with a positive tone overnight. All major bourses are trading higher this morning with the notable exception of the Nikkei (-0.9%) which is lagging ahead of the official nomination of the BoJ governor and deputies expected by the end of the week. USDJPY is marginally lower at 91.98 and the region’s credit markets are trading around 1-2bp tighter on the day.

While Europe frets over the Italian stalemate, we should also note that we are a couple of days away from the point where the US budget sequester comes into effect (March 1st). We may get an update on where things stand today with reports suggesting both the Democrats and Republicans are preparing rival bills to replace or delay the sequester, to be voted on by the Senate on Thursday. According to the Hill, the Republican plan would maintain the level of spending reductions but give the President more flexibility to minimize their impact on government services. The Democratic package, meanwhile, would delay the sequester through to the end of the calendar year and offset the $110 billion cost with a mix of spending cuts and tax increases.

Turning to the day ahead, Italy will be testing investor appetite with a EUR2.5bn 5-year and EUR4bn 10-year auction this morning. In terms of data, euro area economic sentiment and consumer confidence in France and Germany are the main prints. Across the Atlantic, US durable goods and pending homes sales are scheduled. Bernanke speaks again at the House Financial Services Committee at 3pm London time, but we would expect that Fed Chairman will add little to his Senate testimony yesterday.

and.......

http://www.guardian.co.uk/business/2013/feb/27/eurozone-crisis-italy-elections-bond-auction

Italian bond sale success

Breaking: the results of the Italian debt auction are in, and it has gone better than feared.

Borrowing costs are up compared with the previous auctions (no surprise there!), but they are not at dangerous levels. And there certainly wasn't a buyer's strike - Italy sold the full €6.5bn on offer.

Here's the details:

• Italy sold €2.5bn of 5-year bonds at an average yield of 3.59%, up from 2.94% last time.

• It also sold €4bn of 10-year bonds at an average yield of 4.83%, up from 4.17%

And the bid-to-cover ratio (the amount of bids compared to the amount on offer) actually rose, to 1.6, from 1.3% last time.

Word from Brussels that the European Commission president, José Manuel Barroso, will meet Italy's current prime minister, Mario Monti, to discuss the situation.

European Commission says prez Barroso to meet Italian PM Monti tonight. Will discuss elections, statement will follow #Italyvote #wsjeuro

Herman van Rompuy, president of the European Council, has joined the ranks of Eurocrats warning Italy that they cannot avoid fiscal consolidation.

Speaking after meeting the prime minister of Hungary, Viktor Orbán, Van Rompuy said the pair had spoken about " the economic and social situation in Europe".

As I have said before - and others like me - I believe that 2012 marked a turning point in the crisis in the euro zone - and that the worst is now hopefully behind us.

But we should not become complacent - neither in Member States nor at the level of the European Union and the euro zone. There is no real alternative to keep up reforming our economies. There is no way back for any of our Member States.

Moody's has warned it could downgrade Italy

Rating agency Moody's weighed in on the Italian election deadlock last night, warning that it could downgrade the country's credit rating if a government can't be formed, or if its economic reform agenda now stalls.

In a statement, Moody's said:

We would consider downgrading Italy's government debt rating in the event of additional material deterioration in the country's economic prospects or difficulties in implementing reform

A deterioration in funding conditions as a result of new, substantial domestic economic and financial shocks from the euro area debt crisis would also place downward pressure on Italy's rating.

Moody's currently rates Italy just two notches above Junk status, at Baa2.

Shares rally

After yesterday's drama, Europe's stock markets are rising in early trading.

Italy's FTSE MIB: up 106 points at 15657, + 0.7%,

FTSE 100: up 29 points at 6299, + 0.5%

German DAX: up 35 points at 7629, +0.4%

French CAC: up 24 points at 3646, +0.7%

Spanish IBEX: up 64 points at 8044, +0.8%

So why the change? One argument is that investors would actually welcome some grit being thrown into the wheels of the eurozone austerity machine.

The prospect of a Bersani-Grillo government, providing some stability but less fiscal consolidation, isn't a reason to panic.

Investors haven't been demanding that economic growth is choked off recklessly across Europe -- their concern is simply that they get their money back.

Catharsis Ours

Wednesday, February 27, 2013