Yesterday, Thursday 12.1.12 will go into history as the Black Thursday before Friday 13th.
Italy and Spain had to refinance 12bn and 5bn respectively for which they had to pay yields of 6% and 5% on their bonds last year.
In the run up to this auction the value of CDS went up indicating that Italy and Spain would have to pay way above 7%. This 7% marker has been proclaimed by the financial media as the breaking point that would lead to default – a bankrupt Italy, a bankrupt Spain and a destroyed European Union.
These bonds are traded in the City of London exclusively, so are the CDS, the insurances against defaults (explained in “Dollar notes without ketchup”).
The auction started at 9:30, the capitalists (UK and US banks, hedge fonds, insurers, etc) bid 9% > 8.75%.
At that point the City was to gain billions, possibly trillions through CDS. The Murdoch media had prepared its headlines – it was expected that the auction would be undersubscribed leaving Italy and Spain short of cash and the bit they would raise at an unsustainable yield would set the tone for later auctions – the bets on the demise of the European Union would have paid off. British bookmakers had quoted odds-on and the odds were shortening.
At 9:45 not a single bit had been accepted, neither by Italy nor Spain. Then the Bundesbank bid 2.735% for all 12bn worth of Italian bonds. This bid was accepted by Italy.
The Bundesbank made further bids at 1.644% for short term capital – a nail into the coffin of capitalism.
Then the Bundesbank bought the 5bn of Spanish bonds at 3.38%, and to rub salt into the wounds of vultures doubled the bid to 10bn which Spain accepted.
Before 10:00 the battle between capitalism and social market economy was over. It was more than a first round victory, it was a knock-out in the first. The “Markets” are left in no doubt that there will be no rounds to be won.
The Bundesbank has lots of profits but does not need them as these get transfered to the government only and politicians have a tendency to squander these anyway.
It has been calculated that Germany needs to add a 4% “EU solidarity surcharge” on top of the existing 5% “East Germany solidarity surcharge” on income tax to cover all Southern European bonds due this year. The German taxpayer will moan as usual and pay as usual.
This will hardly become necessary as Germany can borrow at a negative interest rate. Their last week bond auction for 6-month money of 7bn was oversubscribed and they have to repay 999 for 1000 borrowed. The “market” trusts that they can repay any amount at that rate.
A few weeks ago Monti was still regarded by many Italians as being more German than Germans and the German insistance of replacing the mafia was seen as unacceptable interference in sovereign matters. On New Years Eve Monti placed thousands of tax inspectors in restaurants. Their turnover tripled, four-folded to six-folded.
For those not familiar with Italy:
A company will take its employees to lunch which takes several hours and business gets discussed, this is a daily routine, the restaurant sends a monthly bill which is a tax deductable expense hence the restaurant needs to declare this turnover. A private luncher needs to be billed and is required to carry this bill with him by law. This requirement lasts until you get into your car – then you hand the bill back to the restaurant employee that accompanies you to the car.
Nobody pays taxes for the very reason that nobody pays and you don’t want to be the odd one out. If everybody pays then you’ll pay as well. There is a big mood swing in this direction now. Monti is no longer regarded as “loss of democracy”.
Against the Italian debt of 1.9bn stand unmortgaged privately owned properties of 8.5bn.
An enforced mortgage of 15.000 Euros per property on average would eliminate all debt.
Norther Italy is the most prosperous region of Europe. Drive down the A1 from Milan to Bologna, passing Piacenca, Parma, Reggio Emilia, Modena, and you see the reality of Italy, modern industries – and many of these companies have Swiss, Austrian and German partners. You’ll hardly find a mid-sized company in Germany without a presence in Northern Italy.
Only the most ineffable capitalist (may I remind you that the term ineffable does not mean clever, knowledgable or intelligent but inexplicable) believes that you can attack Italy without attacking Germany.
These ineffable capitalists are now holding an emergency meeting to work out their losses.
Billions or trillions worth of CDS have become worthless within minutes and need to be written down to zero. I predict they’ll arrive at the same sum that Bundesbank chief Weidmann and finance minister Schaeuble have had on their tables for weeks.
Fortunately for the former mentioned they have the benevolent American and British citizens who will bail them out.
Their next line of attack will be the use of rating agencies. All European countries getting downgraded. This means no more than shouting “mint sauce” at sheep, the “markets” have become irrelevant and no longer determine interest rates when it comes to Euro denominated bonds.
Is there still any justification for trading these in the City?
In an election year where Paris and Milan would rather have those jobs?
Not forgetting the arguments that Franfurt puts forward!
So Murdoch had to scrap his headlines yesterday, the auction results were placed on page three in the financial section without any further comment.
Murdoch will recover his losses, the public always buys his papers and watches Fox.
You get a deeper insight from my book “2012/20 Capitalism Endgame”. You get chapter for chapter as I write it via email. It sets you back GBP 12,20 or Euro 12,20 or US$ 12,20 or any currency – forget about the comma when you pay in Yen or Rupees. You may also switch the figures round to 20,12 – there is no limit to your creativity.
Let me close for today by enlarging Jacques Delors’ statement from Part 1:
“Not all believe in god, nobody should believe in Murdoch, but all believe in the Bundesbank”