Blain's Morning Porridge 
February 7, 2019

"Oh dear. How sad. Never Mind."

I've peeved the Americans two days in a row. In the interests of fairness and balance, EU MiFID 2 regulations dictate I must upset someone else today. So, this morning, let's talk about Italy.

Surely nothing to worry about? After all, the Financial Times reports the new Italian EUR 8 billion 30-year long bond was a blow out success – EUR 41 billion of orders for a Euro 8 billion deal. Let a triumph be declared! Last month it attracted similar oversubscription for a 15-year deal. The bankers can't say it enough: "Great confidence in markets. There is no Italy problem! Buy, Buy, Buy!"

How do you know debt bankers are telling porkies? Their lips move. (US readers: Porkies – Pork Pies = lies.)

Despite the unconfined joy over the bond deals, over the last few days I've read a number of articles and research notes warning of a looming Italian-driven crisis for the euro. Clients have expressed concern: whatever the bankers say, the economy has slipped back into recession, debt is still rising, while the government are literally a bunch of fractious clowns looking likely to split, curdle or be replaced by even less funny ones.

UK economist Roger Bootle wrote earlier this week: "When Italy finally blows up, it will cause both a banking crisis that will shake the European economy and a political crisis that will rock the EU to its foundations."

We wouldn't want to miss that. But, to be fair, we've been predicting Italy's collapse breaking the euro since about 1999 and it ain't happened yet. There is always a way out. It's all very Opera Comedie-Italianne. Maybe this time it's different?

The reality is the Italians have no one to blame but themselves for the awful predicament they find themselves in. Italy should be a European economic miracle – they are warm wonderful people who make beautiful wonderful stuff. Yet, since joining the euro (by dint of everyone completely ignoring the "rules" about debt levels and government spending), the country has been driven into steepening economic decline.

Being a weak country without its own central bank while using the currency of a strong economy is never a smart move – ask Argentina (the Italy of Latin America). The reality is Italy has spent the last 20 years becoming a vulnerable client state of Brussels - the capital of the new European co-prosperity sphere. I won't call it the German Economic Zone - because readers might think I was trying to be incendiary. Ahem.    

Italy is now trapped in a monetary regime that locks its high-value artisan economy into an overvalued currency priced for a "highly competitive industrial mass production powerhouse" (none of these words ever applied to Italy). Germany and Italy are completely non-alike. Italy is the loser. Doubly so, because remaining a euro member means it's permanently signed up to an austerity regime mandated by Brussels with the sole aim of reducing the likely burden on German taxpayers in the event of default. While Britain argues about a EUR 39 billion Brexit divorce bill, Italy's Target 2 imbalances to Europe (by which we mean Germany) are EUR 500 billion!!!

The costs to Italy from the euro are now obvious: massive youth unemployment, populist politics, a demographic time bomb (they will eventually be thankful for economic migrants), and the denial of any opportunity to reflate, relaunch, and reform its economy. Politics haven't helped and, aside from Greece and Hungary, it remains the most corrupt state in Europe as measured by the IMF.

After 20 years of the euro, Italy is trapped in a euro death dance spiral. We just haven't been honest enough to say it out loud. Without European Central Bank support Italy would be bust. The Italian politicians know it – hence the "accommodations" with Brussels to keep the budget down and tighten borrowing. If the anti-EU government(s) could ITEXIT, the currency and inflation shock would trigger massive dislocation.

Just yesterday we had the CEO of one of the largest semi-functional banks, Intesa SanPaolo, admitting the current Italian slide back into negative growth is due to the slowdown in Germany. (No Sh*t Sherlock award winging its way to his office in Milan. Plus I'm sending an ODBO (Order of the Downright Bleeding Obvious) award to him for adding more people to his bank's non-performing loans recovery team.. about 20 years too late.)

On the other hand, the blowout success of the recent bond deals suggests the market doesn't seem to care. Remember Blain's Market Mantra, which include The Market has No Memory!

The new Italian deals worked because the market has too much money and too little inquisitiveness. Investors had to put money to work, and when the the third-largest economy in the eurozone is offering such a yield pick-up on Germany.. what's not to like? Sure, the ECB will find a solution. Nothing to worry about. The market remains willing to buy the story Italy will reform, stick to the rules, remain vaguely investment grade and remain supported by the ECB. The market is betting the ECB will continue to do whatever it takes.

Long term I reckon none of these is likely. Populism has spoken. German voters have made clear they aren't paying. German politicians answer to them. Ultimately, so does Brussels. Italy is doomed to destitution. 

Which leads us to the second part of the problem – how wide will the zone of destruction spread? A crisis in Italy will trigger ructions across European banking – hitting the French banks extremely hard. Bloomberg numbers show France having nearly EUR 300 billion outstanding in Italy while mapping-error Luxembourg has EUR 100 billion!

Oh dear, how sad, never mind..

Back to the day job… anyone for a 10 percent UK property play?

Bill Blain

Shard Capital





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"Oh dear. How sad. Never Mind."

I've peeved the Americans two days in a row. In the interests of fairness and balance, EU MiFID 2 regulations dictate I must upset someone else today. So, this morning, let's talk about Italy.

Surely nothing to worry about? After all, the Financial Times reports the new Italian EUR 8 billion 30-year long bond was a blow out success – EUR 41 billion of orders for a Euro 8 billion deal. Let a triumph be declared! Last month it attracted similar oversubscription for a 15-year deal. The bankers can't say it enough: "Great confidence in markets. There is no Italy problem! Buy, Buy, Buy!"

How do you know debt bankers are telling porkies? Their lips move. (US readers: Porkies – Pork Pies = lies.)

Despite the unconfined joy over the bond deals, over the last few days I've read a number of articles and research notes warning of a looming Italian-driven crisis for the euro. Clients have expressed concern: whatever the bankers say, the economy has slipped back into recession, debt is still rising, while the government are literally a bunch of fractious clowns looking likely to split, curdle or be replaced by even less funny ones.

UK economist Roger Bootle wrote earlier this week: "When Italy finally blows up, it will cause both a banking crisis that will shake the European economy and a political crisis that will rock the EU to its foundations."

We wouldn't want to miss that. But, to be fair, we've been predicting Italy's collapse breaking the euro since about 1999 and it ain't happened yet. There is always a way out. It's all very Opera Comedie-Italianne. Maybe this time it's different?

The reality is the Italians have no one to blame but themselves for the awful predicament they find themselves in. Italy should be a European economic miracle – they are warm wonderful people who make beautiful wonderful stuff. Yet, since joining the euro (by dint of everyone completely ignoring the "rules" about debt levels and government spending), the country has been driven into steepening economic decline.

Being a weak country without its own central bank while using the currency of a strong economy is never a smart move – ask Argentina (the Italy of Latin America). The reality is Italy has spent the last 20 years becoming a vulnerable client state of Brussels - the capital of the new European co-prosperity sphere. I won't call it the German Economic Zone - because readers might think I was trying to be incendiary. Ahem.    

Italy is now trapped in a monetary regime that locks its high-value artisan economy into an overvalued currency priced for a "highly competitive industrial mass production powerhouse" (none of these words ever applied to Italy). Germany and Italy are completely non-alike. Italy is the loser. Doubly so, because remaining a euro member means it's permanently signed up to an austerity regime mandated by Brussels with the sole aim of reducing the likely burden on German taxpayers in the event of default. While Britain argues about a EUR 39 billion Brexit divorce bill, Italy's Target 2 imbalances to Europe (by which we mean Germany) are EUR 500 billion!!!

The costs to Italy from the euro are now obvious: massive youth unemployment, populist politics, a demographic time bomb (they will eventually be thankful for economic migrants), and the denial of any opportunity to reflate, relaunch, and reform its economy. Politics haven't helped and, aside from Greece and Hungary, it remains the most corrupt state in Europe as measured by the IMF.

After 20 years of the euro, Italy is trapped in a euro death dance spiral. We just haven't been honest enough to say it out loud. Without European Central Bank support Italy would be bust. The Italian politicians know it – hence the "accommodations" with Brussels to keep the budget down and tighten borrowing. If the anti-EU government(s) could ITEXIT, the currency and inflation shock would trigger massive dislocation.

Just yesterday we had the CEO of one of the largest semi-functional banks, Intesa SanPaolo, admitting the current Italian slide back into negative growth is due to the slowdown in Germany. (No Sh*t Sherlock award winging its way to his office in Milan. Plus I'm sending an ODBO (Order of the Downright Bleeding Obvious) award to him for adding more people to his bank's non-performing loans recovery team.. about 20 years too late.)

On the other hand, the blowout success of the recent bond deals suggests the market doesn't seem to care. Remember Blain's Market Mantra, which include The Market has No Memory!

The new Italian deals worked because the market has too much money and too little inquisitiveness. Investors had to put money to work, and when the the third-largest economy in the eurozone is offering such a yield pick-up on Germany.. what's not to like? Sure, the ECB will find a solution. Nothing to worry about. The market remains willing to buy the story Italy will reform, stick to the rules, remain vaguely investment grade and remain supported by the ECB. The market is betting the ECB will continue to do whatever it takes.

Long term I reckon none of these is likely. Populism has spoken. German voters have made clear they aren't paying. German politicians answer to them. Ultimately, so does Brussels. Italy is doomed to destitution. 

Which leads us to the second part of the problem – how wide will the zone of destruction spread? A crisis in Italy will trigger ructions across European banking – hitting the French banks extremely hard. Bloomberg numbers show France having nearly EUR 300 billion outstanding in Italy while mapping-error Luxembourg has EUR 100 billion!

Oh dear, how sad, never mind..

Back to the day job… anyone for a 10 percent UK property play?

Bill Blain

Shard Capital



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