The Banking and Strategy Initiative

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European Debt Crisis: Saving Italy, the Merkozy ballot and Liquidity

The Euro is perched at an uncomfortably high 1.34 from here but is unlikely to come down in a hirry even as Santa takes out the reindeer for a December Rush job. Mario Monti’s diktat is worth EUR30 bln ($41 bln) for Italy, $28 bln in cuts and savings, clauses on increase of retirement age and revenues from new wealth taxes and efficiencies in managing Italy’s own South for improving tax collection. As a technocrat, he gets 60 days to get the parliament to approve the diktat, already a law effective unto the land

The United States of Europe are closer to happening than ever before as Mario Draghi and the EU head both agree with Angela Merkel’s plan for a fiscal union by veto of the European Court of JJustice. From the mileage Francois Hollande is getting out of being ont he opposition, it is unlikely that much can stop the fiscal union from becoming a law unto the 17 countries that have adopted the Euro.

The Budgetary controls are thus seemingly miles ahead of where we were a week ago and the promised land is just to be , announcements pending this Friday. The bigger issues now ar eof legitimising central funding of falling national economies whence the new budgetary treaties impose a 5-10% contraction on the bailed out economies by the new budgetary treaties managed by the ECJ veto and a list of tight rules on spending, deficits and probably size of the public enterprise in the economy which remains more than 60% in the affected Mediterranean countries. Fiscal inspections and budgetary controls apart there is no way to monetise the deficit and grow for these EA-17 countries

The central bank funding costs are not really high if the EZ stays with budgetary disciplines and foregoes Eurobonds and pooling onf assets. Collateral is still available to failing banks as they swap out ineligible and weak paper with insurers and non banking financial services businesses incl funds. Many fixed income funds have unnecessarily regarded a specific position for or against as safe and may likely suffer more than the national economies from here on.

A few of the bigger Greek, Italian and Spanish banks will start reporting bank failure this week as the need to save them is balanced out by the end of available eligibility even as Greek instalments for debt and thus the underlying promise of saving Italian and Spanish debt is met at the last minute avoiding further discussion except when it entails increasing the haircuts for the banks. The Banks have somehow failed in using policy as a strategy and have to deleverage faster at each end of quarter as market prices deteriorate and we don’t think at this charmed time they will get further bailouts or ECB support, marking them for the learning curve to be built for the Euro.


Image by madmonk111 via Flickr

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One comment on “European Debt Crisis: Saving Italy, the Merkozy ballot and Liquidity

  1. Pingback: China helps itself to a few Euro? | The Banking and Strategy Initiative

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