[kitchencabinetforum] ITALY FOLLOWS THE GREEK PARADIGM! ALL FOUR PIGS ARE IN BIG TROUBLE

Il Duce Berlusconi agreed to an IMF/Fourth Reich supervision in late-night talks with eurozone leaders and Obama on the sidelines of a G20 summit in Cannes. The situation is critical for Italian banks, which have been largely cut off from this important flow of dollars for some time now. http://venitism.blogspot.com

The US Federal Reserve and the ECB, together with the British, Swiss, and Japanese central banks, joined forces to make dollars available to Italian banks until the end of the year. Without this regular intervention by the central banks, liquidity would have long since dried up.

Fourth Reich needs to make sure there is credibility with Italy's targets, that it is going to meet them. Fourth Reich decided to have the IMF involved on the monitoring, using their own methodology, and the Italians say they can live with that. Italy has no problem with surveillance at all, even with the IMF being involved.

What PIGS are experiencing at the moment is a shock and awe. But it was also overdue. PIGS are not innocent when it comes to their decline. But providing PIGS with extended maturities and lower interest rates is in no way a true solution. PIGS need restructured debt in order to have a little breathing room. http://venitism.blogspot.com

PIGS first need to implement credible savings measures. PIGS already have considerable problems in that respect. PIGS also need a strict revenue policy. Tax evasion needs to be fought more effectively. And some things have also gone wrong with PIGS' industrial policy.

The fundamental problem is that politicians believe that markets react in panic, in other words, irrationally. But that's not true. The capital markets aren't children who can simply be quieted down. Investors look at the figures and can see that PIGS are going bankrupt.

Markets are more rational than politicians. Punishing PIGS is a rational thing to do. There are people who have invested their money there and have now determined that the investment is no longer secure, so they are pulling out. In addition, there are players who have taken notice that the yields are rising and they are betting on that. That's the snowball effect which we are now seeing. It is not based on panic, but rather on totally rational appraisals.

The concession by Il Duce is an attempt to shore up Italy's perilous position on bond markets, where its borrowing costs soared well above 6 percent this week. Il Duce Berlusconi's reckless chatter catalyzed a market reaction. Berlusconi publicly questions the austerity drive of his finance minister, Giulio Tremonti, the very man who stands most credibly for a solid Italian finance policy.

Neither a real estate nor banking crisis sparked the financial emergency in Italy. Instead, poor budgetary management racked up enormous debts. Just as it did in the mid-'90s, the euro zone's third-largest economy carries a mountain of debt that equals more than 120 percent of its GDP. That's twice as much debt as Brussels will allow. Only in Greece is the situation worse.

A precautionary credit line is not seen as a credible option for Italy, where one of the main problems has been market confidence. Financial markets see Tremonti as a guarantor of Italy's reform program. "If I fall, Italy will fall and the euro will fall," he declared months ago, brimming with self-confidence.

That may be exaggerated, but financial markets would indeed be in turmoil if he were to be kicked out. The yields on Italian bonds would surge, worsening the debt burden weighing on Italy's finances. In a worst-case scenario, the euro zone's third-largest economy could tip into a downward spiral just like Greece.

With the general climate and Italy's lack of credibility, every small setback or problem is compounded and makes things worse, so the markets cannot have confidence. Italian President Giorgio Napolitano is so worried about dramatic consequences that he sent out emissaries to persuade Berlusconi and Tremonti to bury the hatchet. The country can't afford such quarrelling, said the 86-year-old Socialist, whose words carry weight across the political spectrum.

Italy is a test case for the anticrisis package agreed in Brussels last week. Italy holds the key to the euro zone debt crisis. Developments in Italy are a crucial test for the credibility of the anticrisis framework set up by the EU. Doubts have risen over whether the planned austerity measures will be implemented. There are also rumors that their main steward, Tremonti, may leave his post.

Risk premiums for Italian government bonds have therefore reached record levels, which could endanger the country's banks, a number of which have invested in domestic bonds. Rome would be forced to prop up some of these institutions - but government coffers are empty. Speculators have started to bet the country will become insolvent.

Italy, eurozone's #3 economy and biggest government bond market, goes the way of Greece and requires a bailout. New debts must remain under the European average and fall below the Maastricht Treaty's criteria of three percent of GDP by 2012. To reach this goal the Italian government plans to save some €45 billion over the next two years.

There is much to suggest that Rome can overcome this crisis more effectively than other southern European governments. The economy is still quite productive, the savings rate is comparatively high and its bond market is the third-largest in the world.

Il Duce has repeatedly promised to make deep reforms, balance the budget in 2013 and trim the public debt, but there are doubts about his commitment. A clause in a draft communique for the Cannes summit shows Italy must bring its budget close to balance in 2013 as part of a package of economic pledges aimed at reducing economic imbalances. http://venitism.blogspot.com