Is Italy running out of money?
By Rob Parenteau
Just today, Michael Schussele pointed me to a number of articles on the European sovereign debt crisis. I think this is an important point about Italy running out of cash in Ambrose’s Evans-Pritchard’s article for the UK Telegraph. It must be one of the key reasons investors are fleeing Italian bonds (Spain has longer to go apparently, but same issue, just less debt maturing than Italy in the near term). Notice it is predicated on 1) both countries losing ability to sell debt to private investors, and 2) failure to increase EFSF funding in a timely manner, and so the funds available for secondary market purchases in government bond markets are eventually exhausted.
I believe, from my experience in the financial world, that institutional investors have learned how to create and game self-fulfilling prophecy runs in various asset markets. (George Soros understood this and demonstrated its efficacy with his effort to break the pound in 1992.) Indeed, this is one of the "secrets" to manufacturing higher absolute returns if you are a hedge fund portfolio manager – namely, creating and managing such bandwagon effects. One of the keys to this technique is to posit an investing thesis that cannot be immediately proven or disproven, whether you believe it to be possible or not., but which if more people believe it, it will, for a time, appear to come true.
Surely this is the case with the Italy is about to run out of cash before EFSF has a bigger war chest story. Yes, it is possible, but it may also be a low probability event, since, as we have seen all along, when the size of the risks are made apparent, the policy makers find ways to cut deals to keep the game going. In the meantime, it is a plausible simple story with a self-fulfilling aspect to it (the more people believe it, the higher yields go on Italian and Spanish government debt, and the more likely they find fewer private buyers of their debt). That attracts hedge funds.
Another way to think of it is that institutional investors are calling the policy maker’s bluff, and trying to judge how serious they are about using the new EFSF powers. The sharper ones will recognize that only the ECB has the unlimited firepower to take them on, which is one reason I suspect eventually we will see the policy makers agree that the ECB can buy EFSF issued liabilities.
Rob is sole proprietor at MacroStrategy Edge and research associate at the Levy Economics Institute.
The meeting in Brussels about a week ago must have been the final drop for investors. Many have been facing huge losses and the ECB fooling around a year between liquidity crisis and insolvency has deteriorated all the trust and faith.
Many have been purchasing expensive CDS’s to cover some losses and refused to sell their investment to ECB on discount offers. Then again, ECB seems to be the head master deciding when (in this example) Greece is declared insolvent, at least “partially”.
In addition the politicians and the ECB seems to be capable of doing any movement until the last minute. Such paralysis does not improve confidence.
Looks like ECB does everything it can to create more fear and sceptism around the euro zone. It “independency” is questionable as it plays with changing “house rules” and thus it is dishonest player.
Is it then unexpected that the value of Spanish and Italian debt collapses and German debt soars? But this threshold will bring interesting times ahead.
Hip-hip-hooray, ECB!
The ECB is playing catchup all the time. Nothing that they have done so far has acted as a fire break in this crisis. Belgium might be the next domino to fall. Once Italy stumbles the markets will look elsewhere.
“The sharper ones will recognize that only the ECB has the unlimited firepower … ”
One has, then, to ask, where does the ECB itself lie in this spectrum of sharpness? Why on earth aren’t they just pulling out their bazooka?
If there’s a policy gradient slowing the kinetics of the financial curve shift, then why not identify it and call ITS bluff too?
And behind that, can someone just tell propagate some reality messages to the European publics at large?
Otherwise, history will surely reflect on the last two decades (maybe 3) as the “Ass First” leadership moonwalk, with strutting policy wonks moving in reverse, despite the theatrics of their struts.