The 'Technocrats' Are Coming

The ink was barely dry, so to speak, on yesterday's missive on the growing likelihood of Silvio Berlusconi's retirement when it became known that he had indeed decided to step down. He evidently lost his majority in parliament, although the budget still managed to sail through somehow.


It is generally assumed that Berlusconi's main motive in clinging to power for so long were his personal problems – he misused his immunity to escape judicial prosecution in a number of cases, ranging from corruption all the way to the alleged furthering of prostitution of minors. In fact, parliament passed several laws that were designed to specifically protect Berlusconi from the courts.


Allow us to point out here that it is not entirely clear to us whether the attempts to prosecute Berlusconi for this or that infraction were not themselves politically motivated. We are not trying to take sides, we are merely saying that it seems possible. Berlusconi was certainly not a saint – and his behavior disturbed a great many of his more moralistic and often hypocritical fellow countrymen. As we noted before, we always held that he had great entertainment value – which apart from a few all too rare exceptions is just about the best one can reasonably expect from a politician in Europe. 

Yesterday a major German TV station almost couldn't contain itself with glee over the prospect of Berlusconi spending the rest of his days in court defending himself, generously noting that 'perhaps his advanced age will keep him out of prison'. Undoubtedly he made use of corruption and bribery to stay in power for so long. How else could he have survived over 50 (!) confidence votes?  Alas, this is what every Italian politician does – Berlusconi was merely more adept at it than most of his predecessors at this tradition.

Whatever one thinks of his antics though, he was not only democratically elected, he was definitely human. The same can be said of Greece's former prime minister Papandreou.

Both men, so we are informed, are to be succeeded by so-called 'technocrats', which is new-speak for faceless and bloodless bureaucrats who are firmly ensconced in the EU establishment and can be relied upon to implement its agenda. In Greece, Trilateral Commission member and former central banker with the ECB, Lucas Papademos, is rumored to become leader of the new government. In Italy, the former EU competition commissioner Mario Monti (the original 'Super Mario') is frequently mentioned as a likely Berlusconi successor (the mere fact that he is mentioned so often in the corporate media of late reveals that he is the favored 'pick' of the eurocracy).  

It is held that by dint of 'not being politicians', these establishment bureaucrats will be better suited to enforce the type of reforms the EU wants to see enforced (this is of course to say, not really the types of reforms ultimately needed, but simply 'more austerity').


What we have just seen are two bloodless coups. They may have taken place within the bounds of legality, alas,  both Papandreou's and Berlusconi's case are an attempt to circumvent messy democratic solutions for the simple reason that the eurocracy knows it would be in fairly big danger of seeing its power curtailed if such solutions (such as e.g. Papandreou's proposed referendum) were actually pursued.

Regarding the aim of rescuing the euro project, or at least the aim of  delaying its demise, we would certainly agree that this course is the one most likely to succeed. Democracy is in many ways deficient, especially when it comes to the need to implement what are quite unpopular measures.

Alas, as we have often said, we are strongly opposed to the 'centralizers', 'tax harmonizers' and 'redistributionists' that today comprise this so-called 'technocracy' at the center of the EU. As we noted in a debate with friends yesterday:

“One keeps hearing demands for more centralization – tax 'harmonization', which is new-speak for 'let's impose the highest possible taxes everywhere', more 'redistribution', and above all, 'more regulation', especially of the evil financial markets where all sorts of bad things are happening to sovereign bonds nowadays. 

Naturally, fractional reserve banking and the inflationary boom-bust sequences it has brought forth doesn't even rate a mention – since it has also enabled the growth of this huge statist moloch the EU and many of its member nations have become.

What is really needed is some introspection and remembering what the EU was originally about. Its founders wanted to restore 19th  century liberalism to Europe – free trade and freedom of movement for people and capital within Europe. They emphatically did not want to erect some sort of socialist super-state. They wanted to bring back to Europe what the mad socialist and fascist ideologues of the 20th century had destroyed.  Now we have a bureaucratic monster in Brussels that has produced nearly 300,000 new regulations over the past decade, in addition to the hundreds of thousands of pages of 'administrative law' and other regulations the member states themselves produce every year. It is a miracle we still have a functioning civilization. If we want the problems to be solved, the most important question should be: what is needed to enable the production of new wealth? What kind of environment will be most conducive to reviving the entrepreneurial spirit? It should be simple enough, but it would of course threaten a great many vested interests.”


The installation of establishment 'technocrats' as leaders of Greece and Italy may be a positive step in terms of defusing the current crisis, but it is highly unlikely to represent a step in the direction outlined above. It is certainly not a challenge to vested interests, it is rather an attempt to keep the status quo firmly in place.


Jens Weidmann Confirms Our Long Held Contention about Germany's Institutional Memory


One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press:”

Prohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and "specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I"


(emphasis added)


With this, Weidmann has said out loud what we have for a long time considered to constitute the most important 'institutional memory' of Germany's central banking establishment. Its policy continues to be informed by the experience with Rudolf von Havenstein's chartalist experiment in the early 1920's that utterly destroyed the currency and led the country into a profound economic and social catastrophe that ultimately paved the way for the emergence of Hitler's disastrous dictatorship.

This explains the German reluctance to let the ECB engage in 'QE'  – and in fact, the ECB is not allowed to pursue such a policy. Its statutes have been modeled after the German Bundesbank's on purpose, namely in order to avoid the financing of government debt with the printing press. As Simon Nixon notes in an article at the WSJ, one should therefore perhaps not bank on the ECB riding to the rescue of the euro area's bond markets, specifically Italy's.



“But investors shouldn't bank on the ECB doing the market's bidding. First, the central bank has repeatedly said it has no mandate to act as lender of last resort to countries. To do so would breach European law. New ECB President Mario Draghi said so again last week, stressing the ECB's bond buying is limited and temporary.

The European treaty is unequivocal: Article 101 prohibits the ECB from lending to governments, while Article 103 says the euro zone shouldn't become liable for the debts of member states. It would be odd for Mr. Draghi to do something he has said is illegal.

The second reason the ECB may refuse to make huge bond purchases is moral hazard. The ECB would lose its leverage to drive fundamental reform in Italy. The discipline imposed by high interest rates currently offers the best hope of making the euro zone more competitive. And if the ECB accepts the role of lender of last resort to countries, it can't be rescinded. Its relationship with governments will have changed fundamentally, making it hard to resist future demands. The ECB effectively will have ceded a large slice of its cherished independence.

Third, what the ECB is being urged to do would expose it to huge balance-sheet risk. Acting as lender of last resort to a country is different from acting as lender of last resort to banks. Central banks only lend to banks against collateral. But when the ECB buys government bonds, it has no recourse to tax revenues. Some argue a new government in Rome committed to change would reduce the credit risk, giving cover for a change of ECB policy. But not all the credit risk is domestic: A Greek euro exit would seriously damage Italian creditworthiness, not to mention the ECB's balance sheet.

Besides, the real value of a lender of last resort is to provide confidence to investors. Yet the ECB's bond buying in Greece, Portugal and Ireland didn't stop investors selling. Even if the ECB offered to buy unlimited bonds in the secondary markets, Italy might still struggle to raise money in the primary market.”


(emphasis added)

LCH Clearnet Raises Margins on Italian Bonds – Which Promptly Crash

“The cost of using Italian bonds to raise funds rose on Wednesday after clearing house LCH.Clearnet SA increased the margin on debt from the euro zone's third largest country at a time when its bonds yields are close to levels deemed unsustainable.

Banks use government bonds as collateral to access cash in the repurchase (repo) market, in which a handful of clearing houses play a vital role, assuming lending risks to provide institutions with the cash.

Clearing houses, such as LCH.Clearnet, collect cash in the form of margin on individual trades, which they hold centrally to refund members left out of pocket in the event of a default.

When LCH.Clearnet Ltd took similar action on Portuguese and Irish debt as bond yields soared, it added to selling pressure on the paper. Both countries were later forced to seek bailouts.

With benchmark 10-year Italian government bond yields approaching 7 percent, LCH.Clearnet SA raised the initial margin call applied to Italian debt by between 3.5 and 5 percentage points across all maturities of BTP and inflation-linked BTP government bonds. "This step will likely generate spread widening and it will affect the banks' ability to net their positions through LCH," said ING rate strategist Alessandro Giansanti.

The changes, which include raising the initial margin call on 7- to 10-year debt by 5 percentage points to 11.65 percent, will come into effect on November 9 at the market close and will affect margin calls from November 10, Paris-based LCH.Clearnet SA said on its website.”


(emphasis added)

 “Italian 10-year bond yields topped on Wednesday the 7 percent level widely deemed unsustainable after an increase in the cost of using the country's bonds to raise funds offset hopes for more reforms in Italy as its prime minister agreed to step down. A 7 percent yield was seen by many in markets as a red line as countries such as Portugal and Ireland were forced to seek financial aid after yields on their bonds exceeded that level.

The rise, which followed a move by clearing house LCH.Clearnet SA to increase the margin call on Italian debt, drove the 10-year yield premium over safe-haven German debt above 500 basis points or the first time in the euro era. "A lot of people are talking about this level. If it's there for the short term it does not make a difference, but it really does feel like it's a bit of an end-game at the moment," one trader said.

Short-term Italian yields rose even more, with the yield on two-year bonds rising above those on 10-year debt also for the first time since the launch of the euro — a clear signal of investors' rising concern they may not get their money back.  Traders and investors said the European Central Bank, which has been buying Italian bonds in the secondary market since August to keep yields down, stepped in again on Wednesday. [evidently once again to no avail, ed.]

Italy has been the focus of the market anxiety in recent days, with investors increasingly worried that political turmoil is hindering efforts to stop the third biggest euro zone country becoming engulfed by the crisis. Italy's debt is equivalent to 120 percent of economic output and it is too big to be bailed out with currently available resources.


(emphasis added)

Finally, 'too big to bail' appears to have stepped over threshold separating myth and reality.

Euro Area Credit Market Charts

Below is our usual collection of CDS prices, bond yields, euro basis swaps and several other charts. As always, both charts and price scales are color coded. Prices are as of Tuesday's close.

As can be seen, the sell-off in Italian and Spanish government bonds continued on Tuesday with great gusto. We're not even mentioning Greek debt anymore, which continues to get ground to dust virtually every day.

One thing is clear: in terms of CDS on sovereigns and especially in terms of euro area bond markets, the crisis is now more acute than it was before the most recent 'emergency summit'.

European banks hold € 1.2 trillion of Italy's sovereign debt. The crash in Italy's government bonds clearly has the potential to blow up the whole system – we wonder therefore how much longer the ECB will stand aside and refuse to engage in outright money printing.

Another 70 basis points have to be added to the Italian 10 year yield chart depicted below as a result of what happened in today's trading. Also, the 10/2 part of the yield curve has indeed briefly inverted today, which our chart does not yet show. The Italian bond market is crashing – the widely expected and well-telegraphed catastrophe is here.



5 year CDS on Portugal, Italy, Greece and Spain – CDS on Italy end at yet another new high. – click for higher resolution.


5 year CDS on France, Belgium, Ireland and Japan – all trending higher again – click for higher resolution.



5 year CDS on Bulgaria, Croatia, Hungary and Austria – all higher again as well – click for higher resolution.



5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – it looks like Slovenia is about to become yet another crisis flashpoint  – click for higher resolution.



5 year CDS on Romania, Poland,  Slovakia and Estonia – click for higher resolution.



5 year CDS on Saudi Arabia, Bahrain, Morocco and Turkey – mixed – click for higher resolution.



Three month, one year and five year euro basis swaps – turning in the 'wrong' direction again. Bank funding stress in the euro area remains exactly where it was for the past several weeks – click for higher resolution.

Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – still moving higher – click for higher resolution.


The euro-bank CDS index long term, with trendlines drawn in – once again approaching the long term resistance line that was briefly broken last month – click for higher resolution.



5 year CDS on two major Austrian banks (Erstebank and Raiffeisen Bank), based to 100 as of late August. The actual height of the respective CDS in basis points can be worked out with the divisor (it is 308 basis points for Erstebank and 330 basis points for Raiffeisen). This chart shows that they risen by 30% and 36% respectively since late August – click for higher resolution.



10 year government bond yields of Italy, Greece, Portugal and Spain – the relentless sell-off in euro area peripheral bond markets continues apace. Only Portugal looked slightly better on Tuesday – click for higher resolution.



10 year government bond yield of Austria, the 9 year government bond yield of Ireland, UK Gilts and the Greek 2 year note. UK Gilts remain a 'safe haven' – funny enough – click for higher resolution.




Italy's 10 year government bond yield – yet another 14 year high was hit on  Tuesday – click for higher resolution.



Italy's 10 year government bond yield, long term –  a decisive breakout – click for higher resolution.




Italy's 10/2 year spread keeps sinking – this shows the situation as of Tuesday's close, but in trading on Wednesday, this spread has indeed briefly inverted – meaning that there was a stupendous move in the two year note (with the yield up 90 basis points at the time of writing). However, at the time of writing the inversion was no longer in evidence, mainly due to the 10 year yield rising sharply. The curve had already inverted in further out maturities yesterday, i.e. 3 and 5 year notes are yielding more than the 10 year bond since Tuesday – click for higher resolution.




Italy's 10/2 year spread, long term – the sense of crisis has been quite palatable in this recent collapse – click for higher resolution.



5 year CDS spreads on Australia's 'Big Four' banks. These are still subdued due to the recent rally in 'risk assets' – click for higher resolution.. the AUD-JPY cross rate. A bearish divergence has developed, which often is a short term warning sign for stocks – click for higher resolution.



European Banks – An Unmitigated Disaster

The EuroStoxx Bank Index – on its way to test strong technical support at zero? Just kidding – there has to be some value somewhere….we hope – click for higher resolution.



Not surprisingly, European stock markets have plunged this morning, led by bank stocks. Long time readers may recall that we have often pointed out in the past that euro area banks are not only suffering from their exposure to shaky sovereign debt.

An equally big, if not bigger problem, remains their exposure to the still collapsing US real estate and mortgage credit bubble. As we always mention, this is a 'moving target' type of problem – no matter how many losses are written off (and the banks haven't been very diligent in doing so, preferring to move toxic crap into 'held to maturity' banking books to avoid having to mark them to market), fresh losses accumulate again shortly thereafter.


The ongoing collapse in the US real estate market has just been brought home again by news that house prices in Las Vegas have plummeted by 9% year-on-year and a report by Mark Hanson that quantifies the true extent of the 'underwater' mortgage problem.


As reported by CNBC:

“Consider the following from mortgage analyst Mark Hanson: “On US totals, if you figure average house prices use conforming loan balances, then a repeat buyer has to have roughly 10 percent down to buy in addition to the 6 percent Realtor fee to sell. Thus, the effective negative equity target would be 85%. You also have to factor in secondary financing, which most measures leave out.

Based on that, over 50 percent of all mortgaged households in the US are effectively underwater — unable to sell for enough to pay a Realtor and put a down payment on a new purchase without coming out of pocket. Because repeat buyers have always carried the market as the foundation, this is why demand has not come back. It's as if half the potential buyers in America died over a two-year period of time.”

(emphasis added)

Meanwhile, the WSJ published a report yesterday detailing the extent to which European banks remain entangled in this never-ending US housing mess. It makes for sobering reading indeed.

Four years after instruments like "collateralized debt obligations" and "leveraged loans" became dirty words because of the massive losses they inflicted on holders, European banks still own tens of billions of euros of such assets. They also have sizable portfolios of U.S. commercial real-estate loans and subprime mortgages that could remain under pressure until the global economy recovers.

While the assets largely originated in the U.S. financial system, top American banks have moved faster than their European counterparts to rid themselves of the majority of such detritus.

Sixteen top European banks are holding a total of about €386 billion ($532 billion) of potentially suspect credit-market and real-estate assets, according to a recent report by Credit Suisse analysts. That's more than the €339 billion of Greek, Irish, Italian, Portuguese and Spanish government debt that those same banks were holding at the end of last year, according to European "stress test" data.


"There's been very much a pattern of just holding them," said Carla Antunes-Silva, head of European banks research at Credit Suisse. "It will be another drag" on the banks' capital and returns on equity.

Bank executives in Europe play down such concerns. They say they have reduced their exposures to risky assets and have enough capital to soak up any losses. They add that investors seem preoccupied with the euro-zone mess and haven't been asking questions lately about the banks' lingering credit-market exposures.

"It's not at all a concern," said a top official at France's BNP Paribas SA, which is sitting on €12.5 billion of asset-backed securities and collateralized debt obligations tied to real-estate markets. The assets are liquid and "priced very conservatively."

The assets could lose value due to a wave of selling by the banks. Last month, regulators instructed many European lenders to come up with a total of about €106 billion in new capital by next summer. Bankers, analysts and other experts say that dumping leftover credit assets is likely to be an attractive method of finding the funds. French banks in particular have pointed to such sales as a key part of their plan to address a cumulative €8.8 billion capital shortfall. If the banks sell the assets at a loss, it erodes their profits and can dent their capital bases. But if they don't sell them, they're stuck with assets that consume significant quantities of capital. The large amount of structured-credit assets still on European banks' books "clearly heightens the importance of capital that banks need," said Kian Abouhossein, head of European banks research at J.P. Morgan. Until now, "they just haven't taken the hits."

Banks in the U.K., France and Germany are the biggest holders of such assets, even after chipping away at their exposures. The four biggest British banks reduced their holdings by more than half since 2007, while four French banks trimmed theirs by less than 30%.

Barclays PLC, for example, is sitting on about £17.9 billion as of Sept. 30, down from £23.9 billion at the start of the year. The assets, which landed on the giant U.K. bank's books before mid-2007, include collateralized debt obligations, composed of securities backed by assets like mortgages, commercial real-estate loans and leveraged loans that helped finance boom-era corporate buyout deals. Barclays executives say they have made good progress reducing their portfolio by selling assets or letting them mature.

At roughly €28 billion, Crédit Agricole SA has the biggest portfolio of such assets among French banks, according to Credit Suisse. The bank's June 30 financial report includes €8.6 billion of CDOs backed by U.S. residential mortgages.

On top of that, Crédit Agricole also has at least €1 billion of U.S. mortgage-backed securities, some composed of subprime loans. With the U.S. real-estate market still hurting, further losses are possible in all these securities.  A Crédit Agricole spokeswoman declined to comment.

Legacy assets are also haunting Deutsche Bank AG. The Frankfurt-based bank is holding €2.9 billion in U.S. residential mortgage assets, including subprime loans. It has an additional €20.2 billion tied up in commercial mortgages and whole loans. The bank says it has hedged nearly all of its residential mortgage exposure.

Analysts at Mediobanca estimate that Deutsche's exposure to such assets amounts to more than 150% of its tangible equity—a key measure of its ability to absorb unexpected losses.

Deutsche Bank said it plans to let most of its legacy assets mature, so it won't face losses selling them at discounted prices.

(emphasis added)

'Not a concern'? Because 'investors are not asking about it'? On what planet are these bank executives? Note the above highlighted fact that e.g. Deutsche Bank's exposure to dubious mortgage assets (which are colloquially known as 'toxic crap') amounts to over 150% of its tangible equity. How can this not be a concern?

Below is a chart showing the amount of mortgage related credit assets vs. the exposure to sovereign debt at a selection of large European banks. As can be seen from this, their exposure to 'toxic sludge' is in many cases much bigger than their exposure to sovereign debt. We think this should most definitely be of concern. Notable exceptions are BNP and Unicredito, which seem fated to go down the drain together with Italy's government rather than with underwater condos in Miami and Las Vegas. RBS on the other hand seems to have hitched its wagon quite firmly to the quicksand of the US 'GFC' legacy.



A chart from the WSJ comparing European bank exposure to toxic US mortgage sludge and euro-land sovereign debt. There are evidently numerous ways for banks to die – click for higher resolution.


As we always say on such occasions: you couldn't make this up.


As Bloomberg reports (link: (, Italy's woes 'spell nightmare for BNP and Credit Agricole'
French banks hold over €416 billion in Italian debt  (claims against both government and private debtors). Once again, this is highly likely to redound on France's AAA rating should the French government decide it needs to bail its banks out.
If France's AAA rating falls, the EFSF as it is now constituted is absolutely certain to fail. A giant trap-door has just opened.
There are rumors in the market that the ECB is holding an emergency meeting. As we noted before, there is a bull market in emergency meetings. It remains to be seen whether Mario Draghi finds the 'print' button on the ECB's keyboard. The gold market and stock market seem to think he will.

Addendum 2:

It appears Lucas Papademos is out of the race – instead, house speaker Filippos Petsalnikos appears to be the latest  favorite for the post of Greek prime minister.

Charts by: Bloomberg,



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5 Responses to “Italian Titanic hits Iceberg, Technocrats Supposed to Save the Euro”

  • worldend666:

    Well, Pater – here we are. News today that countries will be allowed to leave the euro and stay in the EU. The dream to buy a Greek Drachma denominated stock market at a 97% discount to it’s 2007 peak may well come true!

  • Outlaw:

    I love all these new words the globalists / NWOs engineer to cover up what they’re really doing. “Technocrat” or “Technocracy” has a nice sound to it, sounds technological and scientific, and therefore legitimate. It also sounds somewhat related to democracy.

    But what it really is, is an oligarchy. A small group of people having control of a country, organization, or institution. They are unelected, and can be expected to stay that way, and delay new elections indefinitely until the “crisis is over”, which of course it never will be. Its a form of despotism, especially if there’s a single individual in the oligarchy who has most of the power, and especially if this oligarchy has no check on its power like a consitution, etc.

    This is the globalist effort to use the crisis to grab more power. Very worrisome.

    • Yes, in this particular case, both Monti and Papademos are bureaucrats recruited from the EU’s central structures – one was an EU commissioner, the other a central bank member.
      They sure are anything but democratically elected leaders. No-one could in fact ever elect them, as they are not even politicians. This is not to say that I harbor any love for the venal political class, just saying, these guys are even one further remove away from democracy.

  • worldend666:

    Hmm, at some point US real estate has to be a good deal. Given that yields in Las Vegas are around 10%, buy-to-let landlords would not be losing much there now, even if property fell 9% year on year.

    The banks, however are not letting out their real estate portfolios. I can tell you this from personal experience as I have tried to rent dormant property from US banks without success. These people really are not interested in earning a real world return on their assets. The latest and most fashionable form of bank income seems to be exclusively the Federal Reserve. Why work for your money?

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