Wednesday, 9 November 2011

FOREX update: All roads lead to Rome

So much erratic behavior on the FOREX markets today as the European contagion has definitely spread to Italy. Berlusconi has yet to resolve the political crisis which his country is facing as the austerity measures have not been voted by the dwindling majority. As a result, 10 year Italian bond prices have soared past 7%, a level at which Greece was already asking for European bailout and without quick measures Italy will follow the same path.


Finally someone took the punchbowl away from S&P traders and forced them into a prolonged hang-over, as the US index has slumped by more than 2.4% to the level of $1246, in what looks like a reality check. When traders realise that Italian debt exposure is much larger than Greek exposure (the  Italian bond market is one of the largest in Europe), so the insolvency of a state is not a local event it, au contraire, it became an event with global implications S&P could find itself closer to $1100.

Golden future

Gold has been having a field today up until now as it soared past the $1800 market, and currently trading at $1792. Rumors are that the Italian central bank has been asked to post gold as collateral for future bond issues and this may soon become the industry norm. According to the  World Gold Council central banks kept accumulating gold throughout last quarter. Still majorly bullish on gold.

All roads lead to Rome

Italy is in bad shape and not only because Berlusconi is struggling to push further austerity measures without a parliamentary majority, but also from a financial point of view, as it find debt service harder and harder now with yields at 7%. As Italy is actually guaranteeing a large chunk of the EFSF so called "capital" (one may argue they are after all promises in vain) it is hard for me to understand who will bailout this too big to bail country. Meanwhile lets feast on a juicy post from Zerohedge which describes Italian exposure (banks and sovereign):
Below are the banks most exposed to Italy. Don't forget that courtesy of our wonderful fractional reserve financial system, with everyone's asset being someone else's liability, the question then becomes who has most exposure to these banks, and then most exposure to banks that have exposure to these banks, and so forth.
  • Intesa €60.2 BN
  • UniCredit €49.1 BN,
  • Banca Monte €32.5 BN
  • BNP Paribas €28.0 BN
  • Dexia €15.8 BN
  • Banco Popolare €11.8 BN
  • Commerzbank €11.7 BN
  • Credit Agricole €10.8 BN
  • UBI €10.5 BN
  • HSBC €9.9 BN
  • Barclays €9.4 BN
  • SocGen €8.8 BN
  • Deutsche Bank €7.7 BN
And the exposure by country, courtesy of Reuters:

Conclusion? More pain for European sovereign debt holders (wassup Blackrock?) and France's AAA rating (and consequently EFSF's AAA rating) is going to be revised. Take care.

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