Italian Politician Beppe Grillo Says Italy at War with the ECB

Italian politician, comedian and blogger, Beppe Grillo founder of the Five Star Movement which in the 2014 Italy’s European parliamentary election placed second says Italy has been at “war” with the European Central Bank (ECB), from the ANSA.it:

The European Central Bank is a greater foe than Islamic militant group ISIS, said Beppe Grillo, leader of the 5-Star Movement (M5S), as he headed for a meeting Wednesday with the president of the European Commission, Jean-Claude Juncker.

"We are not at war with ISIS or with Russia, but with the ECB," said Grillo.

The M5S leader was planning to present his campaign for a referendum on pulling Italy out of the single-currency euro to the European Parliament in Brussels.

"We are tired of the sacrifices, we want to regain sovereignty over our currency, (and) save our businesses," said Grillo

As I have previously noted, not only has the ECB been faced with legal and technical hitches on their recently implemented credit easing (QE) programme, political roadblocks like in Germany or the above have likewise been mounting, thus narrowing the window of ECB’s Risk ON joy ride.

The ECB has essentially been underwriting the demise of the euro

Tick tock.Tick tock.

Italian Government Bails Out Rome

2014 is turning out to be a very interesting year. Two months into the year, we have seen several bank runs (Thailand, Kazakhstan and Ukraine) and also we saw China’s bailout of a delinquent shadow bank.  

Fresh reports say that cash strapped Rome has been bailed out by financially beleaguered Italian government.

From the South China Morning Post:

Decadent and in decline, its beauty imperilled by physical and moral decay, the Rome portrayed in Paolo Sorrentino’s film La Grande Bellezza could end up giving Italy a yearned-for win at the Oscars on Sunday night. But off-screen and far from the glitz of Hollywood, the financial troubles of the eternal city – and the daily trials of its long-suffering residents – are no cause for celebration.

On Friday, at the end of a week which saw the spectre of bankruptcy loom large over the ancient capital, the Italian federal government said it had approved a last-minute decree that would give an urgently-needed injection of funds to the city, thus staving off imminent disaster.

While not detailing the new plans, cabinet undersecretary Graziano Delrio said the sum to be transferred to the municipality “remains the same”– around 500 million euro (HK$5.3 billion) – as had been envisaged under a previous decree ditched earlier in the week by the government.

Nicknamed “Save Rome”, that decree had become so bogged down in a verbose and venomous parliamentary process that Mateo Rienzi’s new administration withdrew it and said it would find a new way of helping the Rome authorities plug an 816 million euro hole in their budget.

So bailouts of financial boils appear to be a deepening global trend.

Mired in stagnation, it’s a wonder how Italy can afford to conduct such actions

Italy’s debt levels remain one of the highest in the Eurozone (chart from CFR)

And Italy’s economy continues to grapple with record level of unemployment. 

chart from tradingeconomics.com

Reports the Bloomberg:

Italy’s unemployment rate rose to a record high in January, signaling that companies may fail to hire even after the economy returned to growth in the last quarter of 2013.

Unemployment increased to 12.9 percent from 12.7 percent in December, the Rome-based national statistics office Istat said in a preliminary report today. The January rate is the highest since the data series began in the first quarter of 1977. The median estimate of five economists surveyed by Bloomberg called for an unemployment rate of 12.7 percent last month.

Not to worry, the bailout, which will likely be funded by more debt issuance, will benefit from the reemergence of Italy’s convergence trade as bond yields shrink to record lows.

This means zero bound interest rates will accommodate Italy’s spendthrift ways (chart from Danske Bank).

The reason for record low yields? 

Italian banks have been stuffing their balance sheet with sovereign debt…

…as Japanese investors chase yields also by piling into Italian yields, notes the Zero Hedge. Rallying yields have been inspired by ECB’s Mario Draghi pledge to “do whatever it takes” to preserve the Euro

Italian stocks as measured by the FTSEMIB has also been booming.

So in Italy we see a parallel universe, stagnating economy in the face of booming stocks and bond markets. Convergence in interest rates and divergence in economic performance. Wonderful no? 

And Rome’s bailout will add only to Italy’s economic woes via a larger debt burden and a shift of resources to uses of lesser value or more malinvestments.

On the political front, the Italian Prime Minister Enrico Letta recently resigned and has been replaced by Matteo Renzi who at the moment has been working to gather support for a coalition government. As noted by the Economist in 2013, in 67 years the Italian government has had 62 governments due to a highly fragmented political sphere.

So in order to gain broad political support, politicians will have to ensure doleouts to various interest groups, and Rome’s bailout has just been one of them. 

So in spite booming markets, which is a sign of resource redistribution from the economy to the banking and political class, the Italian financial crisis still lingers and may resurface soon. Rome's bailout may have signified the proverbial "shot across the bow" of the periphery spreading to the core dynamic.

The Rome bailout also demonstrates why Eurozone is also a fertile candidate for a global Black Swan event.

Is the Euro Crisis Back???

All it seems to expose on the mirage of ECB Draghi’s jawboning communication strategy has been the recently concluded elections in Italy.

From Ambrose Pritchard of the Telegraph, (bold mine)

The Five Star movement of comedian Beppe Grillo, which won 25pc of the vote, has called for a euro referendum and has a return to the lira as one of its manifesto pledges, while ex-premier Silvio Berlusconi has threatened to pull Italy out of the currency bloc unless the EU switches to a reflation strategy.

Even if the centre-left leader, Pier Luigi Bersani, can put together a “grand coalition” with Mr Berlusconi, there is no going back to the hairshirt regime imposed by Mario Monti’s technocrat government at the EU’s behest over the past 15 months…

The great fear is that the European Central Bank (ECB) will find it impossible to prop up the Italian bond market under its Outright Monetary Transactions (OMT) scheme if there is no coalition in Rome willing or able to comply with the tough conditions imposed by the EU at Berlin’s behest. Europe’s rescue strategy could start to unravel.

Meanwhile, French Industry Minister Arnaud Montebourg has called for the ECB to work on the weakening of the euro through debt monetization.

Here is a noteworthy quote from Minister Montebourg from the same article: (bold mine)

“I am expressing personal sentiments here but the debate has started within the euro group on the euro being too strong and the role of the ECB,” he said. “We have to look at what’s going on the world. All central banks that are doing their job are doing it this way.”

The central banking inflation creed has been deeply embedded on the mindset of political agents and has become a populist political selling point.

Following Italy's elections, euro spreads have began to widen…

chart from Bespoke Invest

…as the euro and European stocks (Stox 50-lower and Dow Jones Italy-behind) plummeted. (charts from stockcharts.com)

And given the expressed desire to revert or “return to the lira” or switch to a “reflation strategy” or for a weakening of the euro from Italy’s politicians, as well as, from the French Industry Minister, this means the prospects of more inflationism…

And as I recently pointed out, the recent collapse of gold prices have been tightly linked with the contracting balance sheet of the ECB.

But such dynamics seems to have turned the corner or that the recent bounce of gold may signal or signify anticipations of more inflation from the ECB.

By closing 1.2% higher last night, Gold has reclaimed the $1,600 price levels, particularly at 1,612.

Like US counterpart, ECB’s Mr. Draghi seems to be boxed into a corner: either inflate or the lira will make a comeback.

Will current political developments in the Eurozone compel Mr. Draghi to relax on the strict conditionality he has imposed on crisis stricken nations in order to activate the yet to be tapped Outright Monetary Transactions, or OMTs?

We are living in interesting times.