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European Banks recapitalization: Italy falls?

 On the Contrary, Belgium and Portugal become happier places..


Italian Default Probabilities Rise exponentially overnight even as Belgium and Portugal enjoy good fortune and the Eurozone investors keeps saying the Eurozone is safer in 3- 5years(Vincent Albano on Reuters Insider) The first chart shows the jump in Italian default probability ( used to price CDS – that in turn affects Yield) while the two on the right show how Portugal and Belgium are now back to being safer to live in and who more people are now interested in buying their debt and thus offering a much narrow spread


How the Italian Bond crossed 7%

When London Clearing house did its margin reworking for the week, it just recalculated the Margin Requirement for Italian 10 –


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year bonds from 6.65% to 11.x% and when he did we got an instant tweet from Nourel Roubini saying Italian Debt reaches ponzi levels a s yields on the 10-Y Italian Sovereign Debt no longer cheap to hold for banks rose a mile to 7.447% currently before the US markets opened.

Banks holding Italian debt

Regional Italian Banks like Unicredito and Intesa hold EUR150 bln of Italian Debt, with Intesa holding EUR 60 bln. French Banks also still hold large counts aof Italian paper with I believe at least EUR 20 bln with BNP alone. HSBC and Barclays hold EUR 5.5 bln and EUR 10 bln of GIPSI debt , more Italian and Spanish as they rid themselves of GReek and Portugese debt last month, but are comfortable. The UK though holds nearly EU 75 bln Italian debt as the Eurozone’s largest trading partner.

The case for Italy

This is how the situation has unfolded barely an hour ago even as Berlusconi’s promised resignation is yet awaited by many political observers Italy is likely to go along with Austerity measures after 2010 budget was passed yesterday Swedish FM Anders Bjorg feels Italy should concentrate on selling its large holding of state assets. The crisis is special for Europe’s hird largest economy after France and Germany as most of the state occupations are controlled in numbers by government license. For exampe there are a 10k Taxi drivers allowed right now and when that is opened to the rest the license fee on the cars and the license paid by current taxi drivers would be a sunk investment and take the spiral of the vicious cycle into a strongly underlined strength each time such a nin economic event cuts into the state’s remaining capital

Lessons from UK

Even UK is going to be printing GBP 1 Tln or EUR 1.2 Tln to fund its recession without defaulting on any debt for its QE3, most of it without impact on GDP. Euro zone gets into this cycle according to current signs after Germany breaks into a recession and Italy, Spain and France drive them to bankruptcy

China walks down from an inflation high as bailouts continue in the USA

Meanwhile, Italian thinkers can take solace from the fact that Chinese inflation cycle seems to have been broken by state controls alone as inflation ticked down to 5.5% from a high 6.1% in September and PPI fell faster from 6.5% to a low 5% US inspiration for Italians is sketchy however as Fannie Mae runs into another $5 bln in losses as mortgages keep falling and it needs another $7.8 bln from the treasury to tide it over and cover dividends. FNM is party to a $16bln suit against major Mortgage Servicing banks including European players like RBS, SocGen and HSBS bought into US during the housing boom

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Italian Bank Intesa cuts Greek debt, jobs

While ECB is busy buying Italian paper., Italian banks having bought Greek paper from the ECB window are now marking it to the same 50% – 75% mark adopted by FRench Banks and other European banks. After Socgen used up all of its profit to markdown its Greek holdings, Italian Intesa also managed to report a EUR527 mln profit while marking down its Hellinic railways investments , Interest Rate derivatives and Greek Bonds. The Bank has a 10.2% Tier I ratio after writing down EUR 593 mln and need not find itself more capital.

EUR 60 bln has left Greece and EUR 80 bln left Italy during the month of October from reports on Dow Jones wires as more citizens start believing in cash Italy’s GDP was a good EUR 1,600 bln in 2010 and even if it contracts by 10% it would remain alarge Economy after 2011 interest payments and weaker GDP are counted. However Greece and Italy would have gone very differently if they had not been part of the Euro

ECB’s overnight emergency lending facilities which lend at a punitive 2% rate were used to EUR 7.7 bln than the usual couple of hundred thousand. The Lehman November in 2008 saw a high of EUR 15 bln from this facility. Emergency deposits directly with the ECB rose to the same November 5, 2008 week’s EUR 298 bln yesterday as margin reqts on Italian bonds hit investors and took Italian yields up. Intesa continues trading in Italian debt according to yesterday’s statement by its CEO

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Countering the rise in Spreads?

While in Portugal and Ireland investors had left the table when spreads to a mix of German French and Duch debt (regarded as riskfree) reached 450 bp at around the 7 pct mark, they are unnlikely to drop off while ECB is buying and also because the “benchmark” has itself been going thru thre mini crisis and French andGerman yields itself are no longer sacrosanct

Also, we are still looking if Italy has any 2011 instalment of interest or principal due

The following Calendar would go a great deal to ease investors minds as these numbers unlike for Greece are a much smaller proportion for Italy to pay (There is more to comparing Italian default with US bankruptcy for the two weeks in August)

(Reuters)The following table shows Italian
debt coming due between November 2011 and October 2012.
    Data from Italy's Treasury website updated to end-October.

    Figures are in billions of euros.

    BOTs are short-term Treasury bills.
    BTPs are fixed-rate bonds.
    CCTs are floating-rate bonds.
    CTZs are zero-coupon, 24-month bonds.
    The issues on foreign markets are denominated in euros

          BOT      BTP      CCT     CTZ   FOREIGN    TOTAL
  Nov    14.850   0.028   15.480           2.850    33.207
  Dec    22.462                            3.156    25.618
  Jan    15.200                            0.400    15.600
  Feb    16.735   25.858          10.600            53.193
 March   17.050   14.871  12.277           1.139    45.338
  Apr    17.600   15.479          12.274            45.353
  May     6.600                            0.567     7.167
  June    6.115                            3.412     9.527
  July    7.425   17.055                            24.480
  Aug     7.150                   11.501            18.651
  Sept    8.250   11.406                   0.270    19.926
  Oct     7.700   18.373                   1.717    27.790
 TOTAL  147.137  103.069  27.757  34.375   13.511   325.850

Next Steps in Italy

A National Unity government is being mooted, Elections calendared and firstly a lot of austerity measures need to be cleared in the

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(CNN)The next step is for the Italian parliament to pass the measures — which include tax rises and an increase in the retirement age — possibly as soon as the end of the month.

Berlusconi will then step down and President Giorgio Napolitano will decide whether to form a government or call for elections.

While Berlusconi favors elections soon because he believes his party can win them, many opposition members and European leaders would like to see an interim government in place

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