The Banking and Strategy Initiative

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European sovereign debt crisis: Italian downgrade a good pointer to FOMC proceedings

GDP Growth of Greece compared to the Eurozone ...

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As Silvio Berloscuni continued to invoke great theater and try its best to pass austerity measures of $18 blln hanging fire for more than three months, S&P finally downgraded Italy to A from its A+ rating with a negative outlook ECB was stil buying Italian debt till yesterday, this weekend ‘s operations totalling Euro 10 bln including Italian debt. moody’s and Fitch are yet at Aa2 and AA- just above the last rung awarded by S&P to Italy. Below this A rating further downgrades will take Italy into the border of speculative grade credit like Portugal or even lower CCC for Greece which is still 11 rungs or notches lower than the A grade credit Italy possess now. Italiana nd Spanish sovereign spreads of 2 yr and 10 yr sovereign paper are trading at just below 6% and 4% spread against the German Bunds

Apart from EU’s EFSF,  China’s Sovereign funds/ pension funds are the other option but BRIC nations are negotiating for a better trading partner status as given to Russia by the European Union . The market economy status would otherwise come in 2016 to China

As Greece nears default the expectation of systemic contagion is high with Greek debt of $500 bln 5 times more than earlier default cases of Venezuela and Russia ( $80 bln and $79 bln) The French banks are already trading default insurance at near sovereign rates of 300 bps sicnce last week at SocGen and Credit Agricole Planed Greek austerity measures are expected to include the laundry list of more than a dozen measures introduced by the ineffective government at different times to shrink the public sector by more than 30% . The Greek government is under tremendous pressure as it gives in to nmore public  job reductions to ” reduce the size of government”

Italy’ s Debt burden is closer to $1 tln and that of Spain nearly $ 2 tln followed by a bigger bill for France. french banks were not expected to provision a single penny for Eurozone’s expensive debt and thus the hole is that much larger as four nations near default and austerity measures shrink not the size of government but any national production

Italian Banks each hold almost 10% of their 2010 values in Sovereign Debt and if eurozone restructurings/defaults start without complete rollovers all of BBVA of Spain, Banco Popular and Intesa San Paolo would lose all their earnings like UBS. Unicredito has already pared down its sovereign holdings but the risk at Soc Gen , BNP and Credit Agricole is much higher because of the French regulation promoting Euro sovereign debt for possibly political mileage in the Eurozone..(Banks most exposed to the European Sovereign Debt crisis)

The Euro has ticked down to $1.36 levels but further fall may be dependent on the US fed’s prescription out by tomorrow afternoon. Any easing on both sides of the pond may mean quicker depreciation of the Dolalr and shore up the euro before its inevitable fall back to $130 and then probably below $1.20 by 2012

Italian government has been found to be ineffectual with the austerity bill hanging in Parliament despite changes in the Cabinet and not helped by PM Silvio’ Berlusconi’s escapades outside the parliament

The US Fed is running joint 90 day swap facilities for European Banks to avoid a repeat of the 2008 liquidity crisis which led to Lehman’s shutdown. Even in 2009 and 2008, european banks were big borrowers from the Fed overnight facility. This time the Fed is hoping to solve its problems by extending fixed 90 day paper to European banks like the longer dated Carter Debt of the 8-s it undertook to stabilise its currency

German Logo of the ECB.

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