Europe heading into recession

[MikeT66]

Hmmm... this isn't sounding too good...
https://www.bbc.co.uk/news/world

"The International Monetary Fund (IMF) is apparently preparing a report stating that Italy's debt presents a "major risk" to the Eurozone economy, a source have told Reuters.

Later today, the European Commission is expected to announce that a disciplinary procedure against Italy over its debts will be needed..."

Though, looking at this thread, probably not a surprise.

[mike74]

Printy printy time... in our brave new world of permanent fiscal intervention propping up Potemkin economies we'll never see another recession again

[amgmcqueen]

Recession?! In the land of milk and honey?

Surely not.….

[Digga]

Interesting theory that Italy may be planning a parallel currency: https://www.zerohedge.com/news/2019-06-05/brace-im...

Zerohedge seems to sell this as fact, but it's not, however any default of debt that this Italexit might cause will have significant repercussions in the Eurozone.

[rxe]

CzechItOut said:

I think the main difference is psychology. There is no economic reason why you cannot have a common currency across an economically, socially and culturally diverse number of countries/states, but those people need to buy into the concept.

That is the main difference between why the dollar works in the US, but there always seems to be constant tension in the eurozone.

The main difference is a common fiscal regime in the US, vs. almost no fiscal integration in the EU.

[Digga]

rxe said:

CzechItOut said:

I think the main difference is psychology. There is no economic reason why you cannot have a common currency across an economically, socially and culturally diverse number of countries/states, but those people need to buy into the concept.

That is the main difference between why the dollar works in the US, but there always seems to be constant tension in the eurozone.

The main difference is a common fiscal regime in the US, vs. almost no fiscal integration in the EU.

^This. In very simple terms, if we consider the EU as equivalent to the USA and the constituent Eurozone nations as equivalent to the American States, the following differences exist:

1. No lender of last resort or effective cross-guarantees between national (state) banks
2. No overall lender of last resort for individual commercial and retail banks within the EU

We can once again discuss Target 2 complexities, but people seem to not understand and therefore ignore them. The above is the very simple position.

These are all critical.

[loafer123]

Lots of noise in the press about Target 2.

Particularly interesting in the Telegraph this morning was the informed view that the debt converts to Lira if Italy leave the Euro.

That would be a big big problem for Germany.

[anonymous-user]

loafer123 said:

...the debt converts to Lira if Italy leave the Euro.

Really?

[loafer123]

fblm said:

loafer123 said:

...the debt converts to Lira if Italy leave the Euro.

Really?

From the Telegraph;

“Mario Draghi, the ECB’s president, says the Bank of Italy will be liable for every last euro of Target2 debts if Italy leaves monetary union – although this liability, interestingly, is not recorded by Eurostat in Italy’s debt to GDP ratio.

In reality these debts are a legal minefield. Contracts are subject to the principle of Lex Monetae. Professor Minenna, an expert on Target2 from his days at Bocconi University, says the Bank of Italy is legally entitled to repay the money in “lira” at the prevailing market exchange rate.

“In the case of ‘Italexit’ the ECB would face a currency haircut of 60pc on its Italian Target2 credits,” he said.”

[Vanden Saab]

loafer123 said:

fblm said:

loafer123 said:

...the debt converts to Lira if Italy leave the Euro.

Really?

From the Telegraph;

“Mario Draghi, the ECB’s president, says the Bank of Italy will be liable for every last euro of Target2 debts if Italy leaves monetary union – although this liability, interestingly, is not recorded by Eurostat in Italy’s debt to GDP ratio.

In reality these debts are a legal minefield. Contracts are subject to the principle of Lex Monetae. Professor Minenna, an expert on Target2 from his days at Bocconi University, says the Bank of Italy is legally entitled to repay the money in “lira” at the prevailing market exchange rate.

“In the case of ‘Italexit’ the ECB would face a currency haircut of 60pc on its Italian Target2 credits,” he said.”

Does that mean that Italy will more than half its debts if it leaves the Euro?

[loafer123]

Vanden Saab said:

Does that mean that Italy will more than half its debts if it leaves the Euro?

It’s liabilities under Target 2, it seems.

I don’t know what the position would be for it’s Euro denominated government bonds.

France is particularly exposed to those, as I recall.

[anonymous-user]

loafer123 said:

From the Telegraph;

“Mario Draghi, the ECB’s president, says the Bank of Italy will be liable for every last euro of Target2 debts if Italy leaves monetary union – although this liability, interestingly, is not recorded by Eurostat in Italy’s debt to GDP ratio.

In reality these debts are a legal minefield. Contracts are subject to the principle of Lex Monetae. Professor Minenna, an expert on Target2 from his days at Bocconi University, says the Bank of Italy is legally entitled to repay the money in “lira” at the prevailing market exchange rate.

“In the case of ‘Italexit’ the ECB would face a currency haircut of 60pc on its Italian Target2 credits,” he said.”

Blimey. That's huge.

[Digga]

fblm said:

loafer123 said:

From the Telegraph;

“Mario Draghi, the ECB’s president, says the Bank of Italy will be liable for every last euro of Target2 debts if Italy leaves monetary union – although this liability, interestingly, is not recorded by Eurostat in Italy’s debt to GDP ratio.

In reality these debts are a legal minefield. Contracts are subject to the principle of Lex Monetae. Professor Minenna, an expert on Target2 from his days at Bocconi University, says the Bank of Italy is legally entitled to repay the money in “lira” at the prevailing market exchange rate.

“In the case of ‘Italexit’ the ECB would face a currency haircut of 60pc on its Italian Target2 credits,” he said.”

Blimey. That's huge.

Massive.

I assume from the article that debt converts from Euro to the exit currency (Lira) at the point Italy leaves the Euro (and by this, hence also the EU I believe) after which point the Lira inevitably depreciates?

[christian-ohtc3]

Digga said:

fblm said:

loafer123 said:

From the Telegraph;

“Mario Draghi, the ECB’s president, says the Bank of Italy will be liable for every last euro of Target2 debts if Italy leaves monetary union – although this liability, interestingly, is not recorded by Eurostat in Italy’s debt to GDP ratio.

In reality these debts are a legal minefield. Contracts are subject to the principle of Lex Monetae. Professor Minenna, an expert on Target2 from his days at Bocconi University, says the Bank of Italy is legally entitled to repay the money in “lira” at the prevailing market exchange rate.

“In the case of ‘Italexit’ the ECB would face a currency haircut of 60pc on its Italian Target2 credits,” he said.”

Blimey. That's huge.

Massive.

I assume from the article that debt converts from Euro to the exit currency (Lira) at the point Italy leaves the Euro (and by this, hence also the EU I believe) after which point the Lira inevitably depreciates?

If Italy walks the Euro will crash and the project fails, Italy has the stronger hand so will the EU back down from enforcing their rules or risk Italy walking away from the Euro?

[mike74]

Is this not something else that will just keep trundling on relentlessly, threatening to bring about financial Armageddon to European economies but ultimately not amounting to anything?

[amusingduck]

mike74 said:

Is this not something else that will just keep trundling on relentlessly, threatening to bring about financial Armageddon to European economies but ultimately not amounting to anything?

I bet there were posts just like this before the GFC

[voyds9]

christian-ohtc3 said:

Digga said:

fblm said:

loafer123 said:

From the Telegraph;

“Mario Draghi, the ECB’s president, says the Bank of Italy will be liable for every last euro of Target2 debts if Italy leaves monetary union – although this liability, interestingly, is not recorded by Eurostat in Italy’s debt to GDP ratio.

In reality these debts are a legal minefield. Contracts are subject to the principle of Lex Monetae. Professor Minenna, an expert on Target2 from his days at Bocconi University, says the Bank of Italy is legally entitled to repay the money in “lira” at the prevailing market exchange rate.

“In the case of ‘Italexit’ the ECB would face a currency haircut of 60pc on its Italian Target2 credits,” he said.”

Blimey. That's huge.

Massive.

I assume from the article that debt converts from Euro to the exit currency (Lira) at the point Italy leaves the Euro (and by this, hence also the EU I believe) after which point the Lira inevitably depreciates?

If Italy walks the Euro will crash and the project fails, Italy has the stronger hand so will the EU back down from enforcing their rules or risk Italy walking away from the Euro?

I'm a novice at these things (I think everyone is as it's never been done before). But what I am seeing there is that Italy if it leaves, sets up its own currency (lira) which is effectively worthless.
It then prints billions of Lira to repay the EU, debt settled.
The only place the EU can spend this LIra is in Italy.
So they hold a worthless currency or spend a worthless currency back in Italy which helps bail it out.

[Lemming Train]

mike74 said:

Is this not something else that will just keep trundling on relentlessly, threatening to bring about financial Armageddon to European economies but ultimately not amounting to anything?

This ^. The EU/Euro project will not be allowed to fail under any circumstances. Too many heads in the trough. There will be lots of threats of sanctions and stern words to those members not toeing the line, much like we've seen with Greece. The debt figure on their collective spreadsheets will get a couple of extra digits added but apart from that life will carry on as normal and the can will get another kick down the road.

[Sway]

I wonder what payment terms Draghi thinks apply to the t2 balance?

There aren't any.

So even if the EU do try to force Italy to settle them, they don't have a leg to stand on for any actual repayment Italy could just decide to wait a century before thinking about it.

[Digga]

Lemming Train said:

mike74 said:

Is this not something else that will just keep trundling on relentlessly, threatening to bring about financial Armageddon to European economies but ultimately not amounting to anything?

This ^. The EU/Euro project will not be allowed to fail under any circumstances. Too many heads in the trough. There will be lots of threats of sanctions and stern words to those members not toeing the line, much like we've seen with Greece. The debt figure on their collective spreadsheets will get a couple of extra digits added but apart from that life will carry on as normal and the can will get another kick down the road.

1. Without Italy, as others point out, there is no trough.
2. Italy do hold a lot of the cards here and the EU is not going to have things all it's own way.
3. If the EU fudge things to keep Italy inside the tent pissing out, they have the secondary issue of what the RoW will then value the Euro and bonds.

Up until now, the Euro seems to have defied the gravity of its situation.