Only in a world totally corrupted by easy money could the following two things
be announced on the same day. First:
Yields on the euro area's government bonds have never been lower as the potential
for extended European Central Bank stimulus helps exorcise memories of the
region's sovereign debt crisis.
The bond-market rally is broad based, encompassing both core economies such
asFrance and also peripheral markets including Greece, which was pushed to
the brink of exiting the currency bloc during the region's financial woes.
Another of those nations, Portugal, took a step toward exiting an international
bailout program today as it bought back bonds, while Italy, supported in
the turmoil by ECB bond purchases, sold five-year notes at a record-low rate.
"Investors are starting to look at the non-core European bond markets as
a viable investment alternative again," said Jussi Hiljanen, head of fixed-income
research at SEB AB inStockholm. "Further ECB actions have the potential to
maintain the tightening bias on those spreads," he said, referring to the
yield gap between core nations and the periphery.
The average yield to maturity on euro-area bonds fell to a record 1.6343
percent yesterday, according to Bank of America Merrill Lynch indexes. It
peaked at more than 6 percent in 2011, the data show.
Italy's 10-year yield fell seven basis points to 3.47 percent after touching
3.46 percent, a level not seen since January 2006. Portugal's 10-year yield
dropped four basis points to 4.81 percent and touched 4.78 percent, the least
since June 2010, while Ireland's two-year note yield and Spain's five-year
rates dropped to records.
Then, at about the same time:
Eternal city warns it will go bust for the first time since it was destroyed
by Nero
Matteo Renzi, the Italian prime minister, came under pressure on Thursday
as the city of Rome was on the brink of bankruptcy after parliament threw
out a bill that would have injected fresh funding.
Ignazio Marino, Rome mayor, said city services like public transport would
come to a halt and that he would not be a "Nero" - the Roman emperor who,
legend has it, strummed his lyre as the city burnt to the ground.
Marino said that Renzi, a centre-left leader and former mayor of Florence
who was only confirmed by parliament this week, had promised to adopt urgent
measures to help the Italian capital at a cabinet meeting on Friday.
The newly-elected mayor faces a budget deficit of 816 million euros ($1.1
billion) and the city could be placed under administration if he does not
manage to close the gap with measures such as cutting public services.
"Rome has wasted money for decades. I don't want to spend another euro that
is not budgeted," Marino said, following criticism from the Northern League
opposition party which helped shoot down the bill for Rome in parliament.
The draft law would have included funding for Rome from the central government
budget as a compensation for the extra costs it faces because of its role
as the capital including tourism traffic and national demonstrations.
Other cash-strapped cities complained it was unfair. But Marino warned there
could be dire consequences. "We're not going to block the city but the city
will come to a standstill. It will block itself if I do not have the tools
for making budget decisions and right now I cannot allocate any money," he
told the SkyTG24 news channel.
Marino said that buses may have to stop running as soon as Sunday because
he only had 10 percent of the money required to pay for fuel in March.
He added: "With the money that we have in the budget right now, I can do
repairs on each road in Rome every 52 years. That's not really maintenance."
How is it that Italy is able to borrow money at low and falling rates - which
indicates that borrowers are confident of its ability to pay its bills - while
its major city, far more important to that country than New York or Los Angeles
is to the US, slides into bankruptcy?
The answer is that Rome is irrelevant in comparison with two other facts.
First, Europe is slipping into deflation, which generally leads to lower bond
yields. Second, the European Central Bank is virtually guaranteed to respond
to fact number one with quantitative easing on a vast scale.
So the bond markets, far from rallying on the expectation of a eurozone recovery,
are rising in anticipation of the opposite: a new round of recession/deflation/instability
that forces the abandonment of even the pretense of austerity and the adoption
of aggressively easy money.
In this scenario, a Roman bankruptcy is actually a good thing because it pushes
the ECB, Bundesbank, Bank of Italy and the other relevant monetary entities
to stop dithering and start monetizing debt in earnest. Once it gets going,
the goal of the program will be to refinance everyone's debt at extremely low
rates, push down the euro's exchange rate versus the dollar, yen and yuan,
and shift the currency war front from Europe to the rest of the world. The
race to the bottom continues.
The rest of this series is available here.
