What could be more fitting than the fact that the Rubicon is actually in Italy itself?
In what is looking increasingly similar to European volatility just prior the collapse of ancient Rome, the Italian government has taken both its stock and bond markets for a spin on the Italian-Russian roulette wheel. Vague promises about “constant reduction of debt” by Italian Finance Minister Giovanni Tria have levitated Italian bond prices just a hair, after a 59 basis-point jump in long-term yields caused by another comment last week about Italy being better off adopting its own currency.
In reality, the “constant reduction” Tria has promised is really the anticipation of higher GDP growth relative to still-rising debt, and therefore a “reduction.” In other words, a slightly slower rate of debt-to-GDP growth, not an actual reduction in debt. It’s similar to when the U.S. institutes “spending cuts” by which what is really meant is a slower rate of spending increases on the basis of baseline budgeting.
News consisting of snippets of relatively meaningless quotes will keep shaking European markets as Italy continues to flail its arms against reality, namely, the reality that it is running out of other people’s money.
The disturbing part of this whole mess is that analysts continue to claim that the inevitable – an Italian debt default – is still a long way off. Not that it won’t happen or can’t happen or that the sheer numbers don’t lead inexorably to that end, but that there’s no need to worry about it specifically now.
For instance, in an interview with Bloomberg just last week, Lena Komileva, chief economist of G Plus Economics, was quoted as saying that “Italy can still service its debt even at 10-year yields just below 3%. Political risk is coming to a peak and market risk will settle down before the end of the year.” She continued that that we are “quite far” from an imminent Italian debt crisis.
Well, now 10-year yields are at 3.4%. How “quite far” are we now?
That’s the thing about financial crises. They don’t just gradually take shape. What causes them does gradually take shape. The actual crises materialize very quickly, suddenly, and they don’t give markets time to absorb and react in rational ways. They spring in an instant and once loose, they typically cannot be stopped until they run their course. That is, in fact, the defining feature of a crisis. It springs as people claim it is a long way off. If the timing were broadly anticipated, it would simply be a gradual decline, not a crisis.
When it comes time for this house of cards to fall, that house won’t be dismantled in an orderly fashion, floor by floor. The moves will most likely be sudden and disjointed, leaving Italian banks holding the bag and the euro zone with no time to react to the new market realities.
What’s happening now is just small tremors. The most recent yield spike to new highs of 3.47% on the 10-year is still low by historical standards. When yields top 2011 highs of 7%, that’s when the crisis will probably hit in full force. And when will that be? It is difficult to see how the façade of Italian financial stability can be maintained past December, when the European Central Bank cuts off its bond buying program.
At that point, Italian banks like Banca Monte dei Paschi di Siena S.p.A. (BMDPY, Financial), ironically teh oldest bank in the world still in existence from before Columbus set sail, will suffer the same fate as the National Bank of Greece S.A. (NBGIF, Financial). The Euro could be wiped out.
Just to get a sense of the depth of Italian government delusion here, consider the positively bizarre statement from Deputy Prime Minister Luigi Di Maio, who had some rather outlandish remarks about the proposed Italian budget. “We, in a decisive manner, with this budget law, will have abolished poverty," he said.
Well, at least somebody finally figured out the key to abolishing poverty. It took long enough. We all just have to adopt a budget like Italy and everything will work out just fine.
Come December, the euro zone could easily be in the thick of the existential crisis we all knew has been coming since 2010, but have kept saying won’t happen any time soon. Until it finally does.
Disclosure: No positions.
