| Crisis intensifies |
| 09.11.11 10:44 | |
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Berlusconi may be headed for the door but this morning’s news that LCH.Clearnet will raise Italian margin requirements across the board is another sign that the crisis surrounding Italy is intensifying. The move is designed to protect the clearing house from unnecessary losses but it is also set to further pressure the Italian bond market and so cultivates the negative feedback loop. In Ireland margin requirements were initially raised last May some months before Ireland succumbed to a bailout at the end of 2010. Italy, however, with its EUR1.9trn debt is too big to bail. This poses an interesting question as to how the ECB will deal with this fresh blow to the Italian bond market. Reports have been circulating that the ECB, under the leadership of Draghi, is only just buying enough Italian debt to take the froth out of the market while insuring that heightened pressure remains on the government. This morning’s news from LCH. Clearnet suggests that the ECB will have to step up its efforts to maintain an element of order in the Italian bond market. Meanwhile the markets are coming to terms that the removal of Berlusconi as Italy’s Prime Minister provides little by way of solution. Perhaps a bigger problem facing Italy is the lack of a strong and credible opposition. The markets are hoping for a technocrat interim government charged with the difficult task of implementing structural reform. Berlusconi, however, would favour fresh elections which may expose the lack of cohesion in his opposition and could conceivable pave the way for his return. It is no surprise that the conclusion of the two-day EcoFin meeting yesterday brought an agreement that they need to move quickly to react firewalls to prevent the turmoil further infecting Italy. This is probably a reference to the need to push through the measures that will allow a leveraged EFSF to buy Italian debt. These details, however, may not be in place until the end of the month which once again raises the risk that political developments will not be able to keep pace with market developments. The crisis appears to be worsening and this could see investors increasing their EUR shorts. EUR/USD will remain sensitive to headline news but we cannot rule out another run on the downside towards the EUR/USD1.3300 area on a 3 mth view. source: Rabobank |
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