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Italy's fortunes One of RBC's European economists has taken an in-depth look at Italy and determined that the 7-per-cent bond yield mark that crushed its neighbours may not sound the same death knell for Rome.
"A raft of tools, including simplified calculators, have mushroomed to show that Italian debt had become unsustainable and that the move of sovereign bond yields over 7 per cent meant Italy would have no choice but to follow in the footsteps of Greece, Ireland and Portugal and be bailed out," Gustavo Bagattini says in a new report.
"In our view, such superficial analysis in the current market environment is unhelpful."
Mr. Bagattini's analysis comes after yields on Italian 10-year government paper breached the 7-per-cent mark last week, sending shivers through global markets and making Rome the new focus of the euro debt crisis. Silvio Berlusconi resigned as prime minister, to be replaced by Mario Monti, a former European Central Bank official, who in turn named a cabinet remarkable in that no politicians were included.
Yields eased today, helped along by the ECB stepping in, though there's nothing to suggest they won't rise again. Indeed, they're virtually guaranteed to spike again as investors question whether Italy can survive in the face of increasingly skeptical bond markets.
Mr. Bagattini takes something of a brighter view. He notes that, yes, Italy's debt burden is a high 120 per cent of gross domestic product, but notes the country has scraped through with a debt level that eclipses the size of its economy since the early 1990s. He also notes that Rome ran a primary surplus for years, allowing the government to cut its debt level, though the financial crisis and the stimulus needed ate away at its efforts.
Still, he expects that erosion to end after this year. And by his calculations, its debt-to-GDP ratio would peak at about 122 per cent next year and then start to dip a year later.
"The structure of Italian debt makes it very resilient to interest rate shocks in the short term," Mr. Bagattini added.
"Its longer-term debt sustainability metrics also compare favourably to its euro area peers. But in the current market environment, the fundamentals matter less - the market structure is impaired, and will take a lot to restore confidence not just to Italy but to [European government bonds]in general."
So, if not 7 per cent, what's the crucial mark? Even 8 per cent would not cripple Rome, he says, as the higher costs would eat away at less than half of government reform measures.
Not everyone agrees, of course, which is Mr. Bagattini's point. Some others can't see Italy getting through its funding needs at punishingly high rates given a grim economic outlook
Whither the ECB The European Central Bank is under mounting pressure to do more, more, more, but it doesn't look like it's going to happen.
First, France and Germany are at each other's throats over the issue, and Germany, as everyone knows, is calling the shots in the end. It's opposed to such calls. Beyond that, Mario Draghi, the new chief at the central bank, isn't going for it either.
Several observers see the ECB as the last, best hope in the euro debt crisis, by buying more, becoming the lender of last resort to governments, that sort of thing. But Mr. Draghi won't go that route. Indeed, in a speech today he told euro zone leaders to get off their duffs and actually do something, citing the bailout fund known as the EFSF and asking at a conference in Frankfurt: "Where is the implementation of these long-standing decisions?"
There are also reports today that the ECB is going to put a cap on its bond purchases.
"In Mario Draghi's first major speech as ECB president, he pushed back against calls for further actions by the ECB, namely an increase in asset purchases - highlighting the current dispute between Germany and France - throwing the focus back on government heads to find a resolution on how to leverage the resources within the EFSF in order to get it fully operational," said Derek Holt and Karen Cordes Woods of Scotia Capital.
"Many analysts are now arguing that the ECB may be Europe's best hope in the current situation as even the most recent EFSF offering in November struggled to obtain market demand. But, while the ECB was back in the markets this morning purchasing Spanish and Italian bonds once again, there have been several reports that the ECB has put a limit on the amount of weekly purchases of sovereign debt at €20-billion."
Here's a synopsis from Carl Weinberg, the chief economist at High Frequency Economics:
"The markets are watching the big boys stake out positions around the newly recast question of getting the ECB to finance a big bond bailout. Germany says no way. France wants the ECB to finance the EFSF by making the bailout fund a bank. The markets want the ECB to buy bonds in size, rather than just tinker, to stabilize the markets. The ECB, according to President Draghi, just wants to focus on price stability and asks the governments to do their jobs implementing - and, we suppose, funding - the various half-baked rescue plans already on the table."
Greece sees deficit shrinking Greece sees its budget deficit shrinking markedly next year, though its hopes are largely tied to bondholders taking a 50-per-cent hit.
Finance Minister Evangelos Venizelos's budget sees a deficit of 5.4 per cent of GDP, compared to its current 9 per cent. That's on the basis of the deal without bondholders, without which the deficit would be 6.7 per cent. There's also the question of what's expected to be a further contraction of the economy next year.
Mr. Venizelos also doesn't believe the government will have to go the route of a new austerity program. Not that there's any blood left in that stone, anyway.
Some are asking the question, though there's no real answer at this point, what happens if all the bondholders don't agree?
Inflation eases It may not quite feel like it at the gas station and the supermarket, but inflation eased somewhat in October.
Consumer prices increased 0.3 per cent from October, a tad less than September's 0.4-per-cent rise. On an annual basis, consumer prices rose 2.9 per cent in October, a slower pace than the 3.2 per cent in September. Energy prices were up 11.7 per cent on the year, and food prices up 4.3 per cent.
The so-called core rate of inflation, which excludes volatile items and helps guide the Bank of Canada, eased to 2.1 per cent from 2.2 per cent.
Not that the Bank of Canada doesn't have other things on its mind right now anyway, but inflation, despite remaining above the central bank's target of 2 per cent, isn't going to change the game. And it is slowing.
"With today's data release, we see that the spunk in inflation recorded over the last few months was indeed temporary; lower commodity prices and slower economic momentum are helping to put the brakes on growing inflationary pressures," said economist Sonya Gulati of Toronto-Dominion Bank.
The Bank of Canada is expected to remain on the sidelines with its overnight rate until mid-2013 – the litany of risks plaguing the sustainability of the global economic recovery underscores the central bank's call," she added. "However, the moderate growth environment for Canada should keep inflationary pressures subdued in the interim."
Barrick group rejected Local authorities in the Pakistani province of Balochistan refused to meet a Canadian-Chilean mining consortium for talks before rejecting a bid for one of the world's richest deposits of gold and copper, the company says.
The consortium, Tethyan Copper Company Pakistan Ltd., expressed its disappointment today after the provincial government shot down an application for a mining license at a remote site in the dry hills near the Afghan-Pakistan border, known as Reko Diq, The Globe and Mail's Graeme Smith reports from Istanbul.
The latest statement from the consortium, which represents Barrick Gold Corp. and its Chilean partner Antofagasta, suggests that the problems ran deeper than previously understood.
Business ticker
- Deutsche Boerse/NYSE merger offer concessions for merger approval
- Heinz profit falls almost 6%
- Ontario Power Generation posts third-quarter loss
In Economy Lab The Occupy movement is signaling the decline of the American Dream in the consciousness of that country's citizens, but also warning Canadians that more inequality in the here-and-now sets the stage for a more rigid society tomorrow, Miles Corak writes.
In International Business Housing prices in a growing number of Chinese cities fell last month, weighed down by a sustained government campaign to deflate the market, Simon Rabinovitch of The Financial Times reports.
In Globe Careers Hiring managers tend to bypass résumés with foreign-sounding names, no matter what the level of education and experience, new research finds. Wallace Immen reports.
From today's Report on Business