Italy: Too Big to Fail, Too Big to Save?

Discussion in 'Latest US & World News' started by DonGlock26, Nov 7, 2011.

  1. DonGlock26

    DonGlock26 New Member Past Donor

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    Italy: Too Big to Fail, Too Big to Save?


    Italy's economic problems took center stage Monday as its government, led by increasingly threatened Prime Minister Silvio Berlusconi, faced yet another key vote.


    The health of the euro zone's third-largest economy has come into focus despite Berlusconi accepting IMF monitoring and surviving several confidence votes in recent months.

    Italy's size makes the potential consequences if it were to fail more wide-ranging than the much smaller Greece.

    "Italy has much more systemic implications," Thanos Vamvakidis, Head of European G10 FX Strategy, BofA Merrill Lynch Global Research, told CNBC Monday.

    "It's too big to fail, too big to save."


    The problems facing Italy include the euro zone's second-highest debt-to-GDP ratio, and the lack of a credible alternative to Berlusconi's government.

    Italian MPs will vote Tuesday on the country's public finances, with a number of rebel MPs from Berlusconi's party threatening to vote against the government in protest at the way it has managed the country's finances.

    Yields on Italian 10-year bonds surged last week, and are now dangerously close to the unsustainable 7 percent level. Other euro zone countries such as Portugal and Ireland had to seek bailouts after their yields rose to over 7 percent.

    "The markets don't believe Berlusconi," said Vamvakadis.

    "When other countries were faced with pressure, they introduced more reforms. In Italy, you don't have a clear structural reform agenda."

    Yields on short-term 2-year Italian bonds have also been surging.

    "When yields on short-term debt start increasing at a faster pace than long-term debt you have a problem on your hands because it signals that investors have no faith that you can pay back the money you owe," Kathleen Brooks, research director UK EMEA at Forex.com, wrote in a research note. "It looks like Italy has gone for the bailout-lite option, but will it need to go the whole hog? The bond markets certainly think so, and it could happen sooner than we think."


    There were also signals that the European Central Bank (ECB) will not continue its bond-buying program, which has helped keep bond yields at sustainable levels since the summer. Yves Mersch, a member of the central bank's Governing Council, warned in an interview with Italian newspaper La Stampa on Sunday that it could stop buying Italian bonds if Italy fails to take appropriate action over its debt.

    "They are trying to put maximum pressure on the Italian government to deliver," said Vamvakidis.

    "It's a risky move but I think it's the right decision at this point."

    "It is probably only the ECB’s SMP (Securities Markets Program) program that has prevented Italian bond yields from climbing to even more punitive levels," analysts at Deutsche Bank wrote in a research note. "So it will be a test of ECB firepower and will to keep Italian bond yields under control while the Greek story boils over."

    Christine Lagarde, Managing Director of the International Monetary Fund (IMF), issued a strong warning to the Italian government over the weekend.

    "We will go quarterly [to Italy]," she told reporters.

    "We will check that what Italy has promised Italy is delivering. And if it is not delivering I will say so."


    http://www.cnbc.com/id/45187059


    If Italy goes, the EU is finished. I just hope that Greece doesn't start a domino effect.

    _
     
  2. truth and justice

    truth and justice Well-Known Member

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    It will be worse than that. If the EU is finished (which will happen if Italy fails) then the US and far east countries will be brought down with it. There will be no market to sell goods in Europe.

    The common link between all the countries that are failing in Europe is that they all have a significantly higher proportion of their population working for their government. These government jobs comes with significantly better working rules and conditions than those available for people in the private sector.

    The demise of the richer countries in the west can be directly linked to the increase in wealth of the far east countries. It follows the simple rule that for one country/person to get richer one country/person must get poorer.
     
  3. Lil Mike

    Lil Mike Well-Known Member

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    Frankly, that's absurd. Economics isn't a zero sum game. We're not getting poorer and declining because the far east is getting richer. We're getting poorer and declining because we made a host of bad decisions.
     
  4. Serfin' USA

    Serfin' USA Well-Known Member

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    There's truth in both concepts.

    On the one hand, it's not a firmly zero-sum equation because of changes in productivity and efficiency via technology, but on the other hand, the rate at which the Third World is rising in consumption is mostly outpacing improvements in the applicable technologies.

    Inevitably, a lot of the commodities we take for granted will significantly increase in price as they become comparatively scarce.

    This translates into a fall in standard of living. However, rising debts are also part of the reason for our decline.
     
  5. Lil Mike

    Lil Mike Well-Known Member

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    The problem with that concept is that if you have commodities increasing in price, particularly globally traded ones like oil, the price increase hits everyone equally. That doesn't provide any advantage to the poor but rising countries. In fact it makes it harder for them. We're able to handle the price increased due to increased demand easier than the poor 3rd World.
     
  6. truth and justice

    truth and justice Well-Known Member

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    You are confusing wealth with how much money one has. Richness and poorness is a relative measure.
     
  7. truth and justice

    truth and justice Well-Known Member

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    The manufactured commodities are cheaper to make in the poorer countries leading to a loss of jobs in the richer countries. These richer countries begin to not afford the increase in oil for example. The increase of oil cost to the poorer manufacturing country is passed onto the consumer, being the richer country. Wages are the biggest cost for most manufacturing companies.
     
  8. Lil Mike

    Lil Mike Well-Known Member

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    No, I didn't even imply that.

    Don't forget you propagated the "simple rule that for one country/person to get richer one country/person must get poorer."

    I still find that absurd.
     
  9. Lil Mike

    Lil Mike Well-Known Member

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    If that were the case, the most industrialized countries on the planet would be Haiti and Chad. There are lots of factors that go into manufacturing costs. Wages is only one and not even one of the biggest ones.
     
  10. truth and justice

    truth and justice Well-Known Member

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    I did not say that poor countries get richer. I said that for a country to get richer another must get poorer. That does not mean that all poor countries get richer.

    In the richer countries wages represent a bigger proportion of manufacturing cost than they do in the poorer countries. This eventually leads to these goods being made in the poorer countries which increases the wealth of the poorer country which then leads to a decrease in the wealth of the richer country.

    In your example of Chad and Haiti, they do not have the infrastructure or political stability to compete with other poorer countries.
     
  11. Serfin' USA

    Serfin' USA Well-Known Member

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    It hits everyone equally in a nominal sense, but it's a matter of individual consumption.

    When commodities become more expensive, wealthier countries tend to cut back on their individual consumption. For example, if the price of coal doubled due to a rise in global consumption, that means my kilowatt hour rate would go up in cost somewhat. I would take measures to cut back on power consumption, because my current use of power isn't at a minimal level necessary for what I would consider comfortable.

    On the other hand, people living in the Third World aren't consuming much on an individual level to begin with. Their consumption slowly rises as wages improve, but they don't have the same perspective or decadence as I do. Also, there is the population factor. The Third World is increasing in population much faster than the First World, so even while individual consumption remains much lower than ours, the total consumption increases -- leading to more scarcity for the given resource.

    Overall, there is more incentive for a comparatively wealthier person to cut back on consumption than there is for a person who is slowly experiencing a better life through a gradual rise in income.
     

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