Italy paid a record 6.5 percent to borrow money over six months on Friday and its longer-term funding costs soared far above levels seen as sustainable for public finances, raising the pressure on Rome’s new emergency government. The auction yield on the six-month paper almost doubled compared to a month earlier, capping a week in which a German bond auction came close to failing and the leaders of Germany, France and Italy failed to make progress on crisis resolution measures.
Though Italy managed to raise the full planned amount of 10 billion euros, weakening demand and the highest borrowing costs since it joined the euro frightened investors, pushing Italian stocks lower and bond yields to record highs on the secondary market.
Yields on two-year BTP [Italian government] bonds soared to more than 8 percent in response, a euro lifetime high, despite reported purchases by the European Central Bank.
In a sign of intense market stress, it now costs more to borrow for two years than 10 on the secondary market and borrowing costs for whatever term are above the 7 percent threshold, over which Italy is likely to need outside help if they do not subside.
Zerohedge’s Tyler Durden, no softie, posting on Zerohedge, Peter Tchir dreams up something that might temporarily hold the line:
The EFSF [the Eurozone bailout fund] should announce bonds sales to the Fed. The Fed should purchase 200 billion Eur of EFSF bonds today. They should commit to further purchases of 100 billion in Q1 and Q2 next year. The Fed has been dying to do some quantitative easing and has been looking for a liquidity crisis in need of some liquidity. It has also been looking (quietly) for ways to keep the dollar weaker.
I’m willing to say that EFSF is more of a liquidity problem than a solvency problem. There is limited capital available, and what is out there is not looking for even relatively safe European bonds. I don’t think France is “AAA” but I also don’t see default as anything but a remote possibility for them, so I will view EFSF’s inability to raise money (and there is no way they get to even 440 billion Eur) in this market as a liquidity event. The EFSF should skip dreaming about a trillion. 440 billion Eur doesn’t solve anything, but it can buy 3-6 months at a minimum to keep the markets somewhat stable so a real plan can be put in place.
I am not sure the EFSF wants to do something this simple, but they need to look at the facts and accept the reality that they can barely issue, let alone leverage up. This would give them 200 billion immediately and give the market comfort that they will get their hands on the additional 200 billion as PIIGS bonds mature. 400 billion of fresh new money should be enough to plug some holes while Merkozy and the technocrats finally try and work out some painful, but realistic solutions to the problem.
I am not sure the Fed could buy EFSF bonds, but Ben seems to have fewer restrictions than any other entity on the planet. One of the guests that I was on with at Bloomberg TV mentioned that “the Fed wants to print if the market has a sleepless night”. US stocks are down about 10% from the “close your eyes and pretend it works” rally of October 27th. Could the Fed use that as a way to get involved in Europe? If they buy the EFSF bonds, it should stabilize the US stock market for a bit. It is less risky than buying stocks or HY bonds, which might have a more direct impact on stocks, but are more of a mandate stretch. They can buy mortgages, but seriously, what will that do? I think they could justify buying EFSF bonds (at low yields) in an effort to promote market stability and hence employment, and if they do it in Euro’s the combination of “printing” and “buying euros with that newly printed money” should put a lot of pressure on the dollar. In spite of the inflationary risks associated with that, Ben wants the dollar weak so exports can be helped.
While doing this, the IMF should announce that they will take over all the previously agreed to bailouts of Ireland, Portugal, and Greece. The IMF should be able to do it – they seem to have enough SDR’s and guarantees to do it. Rather than calling on money from their members, they should issue bonds and have the ECB buy them. The ECB can buy the IMF bonds. This shouldn’t be too negative for the currency because the Fed actions would more than offset this printing. The IMF can then take care of all the previously agreed plans to those 3 countries, giving the EFSF more flexibility with its 400 billion of fresh money.
I think this is very simple and can only be used to buy time…
At first glance intriguing, and time is indeed now quite clearly of the essence, but the political eruption such a plan would cause over here would be something to see.