The sharks are circling now: no bullshit about austerity is going to calm them.

Berlusconi and his ministers are insisting the only way ahead after his promised resignation would be elections early next year. That could give Berlusconi another four months or so as prime minister.

It is this prospect of prolonged uncertainty that is spooking investors on markets. Analysts say the clear preference is for Italy to avoid elections and install an emergency government of technocrats, led by Mario Monti, former European commissioner.

If Berlusconi can hold his People of Liberty party together he could withhold the broad-based support that someone like Monti would need in parliament to form a viable government. Berlusconi is weakened but he is buying time and showing he still has cards to play.

Looking at Budget vote in Italy on Monday -- also the day of the Italian government bond auction: dt.tesoro.it/export/sites/s... Minimum bid €500k!

Irelands EFSF auction results: efsf.europa.eu/attachments/fi... Pie charts show sig change in bailout funding. Less Asia /SWFs, less US. More UK & Banks

Inflation is, always and everywhere, a monetary phenomenon.

Hyperinflation is, always and everywhere, the result of trying to use seigniorage to pay foreign-denominated (or inflation-linked) debt.

Using seigniorage to pay down domestic non-index-linked debt can be inflationary (up to politically unpalatable levels) but not hyperinflationary.

See Can Central Banks Go Broke? by Willem Buiter.

"By allowing sophisticated banks to do their own modeling, we are allowing the poacher to participate in being the game- keeper," said Adrian Blundell-Wignall, deputy director of the Organization for Economic Cooperation and Development's financial and enterprise affairs division in Paris. "That risks making core capital ratios useless."
....
The proportion of risk-weighted assets to total assets at European banks is half that of American banks, according to an April 6 Barclays Capital report written by analysts Simon Samuels and Mike Harrison. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon in September described the Basel III rules, which give banks until 2019 to increase their core capital ratio to 9.5 percent of risk-weighted assets, as "anti-American."
....
"As you move to Basel III, these issues will become more ubiquitous, not less," the OECD's Blundell-Wignall said. "The core Tier 1 ratio is a ratio of two meaningless numbers, which itself is a meaningless number because banks can alter the ratio themselves. Basel III does absolutely nothing to address that."
....
One reason there's a difference between risk-weighted assets and total assets is that some securities, such as certain sovereign bonds, carry a zero risk-weighting, requiring banks to hold no capital.

"A basic leverage ratio would be rougher, but it takes away the risk of gaming the system," said Stephany Griffith- Jones, an economist and lecturer in financial markets at Columbia University in New York. "We need to move away from outsourcing regulation of the banks to the banks."

Check out these figures economics fans: UK holds $17.4bn of Italian debt. France holds $416bn - more than 50% of all European bank lending!

Goldman's Francesco Garzarelli has just released a follow up to the "next steps" piece from yesterday (which so far has been woefully wrong in predicting a ceiling to Italian spread). So perhaps this time Goldman will be a little more accurate, which for those who may be buying Italian bunds on the dead cat bounce, will not be a good thing. Here's why: "Should Italian BTPs trade above 450bp relative to AAA-rated EMU sovereigns over a period of time, the initial margin would increase by a further 10%. Currently, the initial margin for repo on Italian securities on LCH ranges between around 4% and 20%, increasing along the maturity structure." The take away from the above - another 10% margin hike is coming. (Emphasis in original)

Unfortunately, I've heard too many similar comments from US Fed officials too, not to mention Chinese, Japanese, and other central bankers.  

If anyone needed the proper epitaph for the insane stupidity out of Europe, Reuters may have just provided it. In an exclusive article, Reuters stuns us with the following: "German and French officials have discussed plans for a radical overhaul of the European Union that would involve establishing a more integrated and potentially smaller euro zone, EU sources say. French President Nicolas Sarkozy gave some flavour of his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe -- the euro zone moving ahead more rapidly than all 27 countries in the EU -- was the only model for the future." It gets much worse: "The discussions among senior policymakers in Paris, Berlin and Brussels go further, raising the possibility of one or more countries leaving the euro zone, while the remaining core pushes on towards deeper economic integration, including on tax and fiscal policy." Not sure how to further clarify this:

(Reuters) - Italian borrowing costs reached breaking point Wednesday after Prime Minister Silvio Berlusconi's insistence on elections instead of an interim government opened the way to prolonged instability and delays to long-promised economic reforms.

In a dramatic escalation of the euro zone debt crisis, Italian 10-year bond yields shot above the 7 percent level that is widely deemed unsustainable, reflecting an evaporation of investor confidence and prompting German Chancellor Angela Merkel to issue a call to arms.

Merkel said Europe's plight was now so "unpleasant" that deep structural reforms were needed quickly, warning the rest of the world would not wait. "That will mean more Europe, not less Europe," she told a conference in Berlin.

She called for changes in EU treaties after French President Nicolas Sarkozy advocated a two-speed Europe in which euro zone countries accelerate and deepen integration while an expanding group outside the currency bloc stayed more loosely connected -- a signal that some members may have to quit the euro if the entire structure is not to crumble.

"It is time for a breakthrough to a new Europe," Merkel said. "A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can't survive."

n last Saturday edition (Nov. 5), Expresso released studies of scenarios made by groups of Portuguese academics. Those studies are pointing to a serious depression in Portugal in 2012, drifting far beyond the official forecast of a 2.8% recession.

One of the consequences of a worsening economic picture could be the need for a restructuring of the Portuguese debt. Expresso heard three Portuguese economists living abroad.

Although the Greek, Portuguese and Irish situations are different, the negotiations with private creditors of Greek sovereign debt (which might involve a cut of 1/3 of face value) and the possibility of a revision of the terms in Ireland of the promissory notes to banks, are processes to be followed closely.

The ECB must become the lender of last resort, Nícolas Barre writes

Commenting in Les Echos, Nicolas Barre calls the ECB to finally become the eurozone's lender of last resort. "This time it's real", he writes. "The markets are about to blow away Italy, the seventh largest economy world wide and the third largest issuer of sovereign bonds." Given the situation the eurozone can no longer what Barre calls an "existential question".

Why is it that the UK with its public finances in a horrible state can borrow at 2.2% over 10 years while Italy has to pay 7.4%? The reason is that in the UK, as in the US, the central bank plays the role of the lender of last resort and the ECB must play this role in the eurozone as well, Barre argues. "The European Union cannot tolerate that one of its six founding countries is suffocated by a dogma. It will not survive otherwise", he concludes.

What is now happening is an unhappy mixture of the second and third options: one-sided austerity with grudging finance. Mr Mayer argues that it could morph into the first. His argument is that the lender-of-last-resort activity of the European System of Central Banks, in favour of banks unable to fund themselves in the market, is financing payments deficits. Central banks of the surplus countries are, as a result, accumulating large credit positions vis a vis the European Central Bank, while those of the deficit countries are accumulating counterpart liabilities (see chart). This is a transfer union. In the long run, suggests Mr Mayer, monetary financing of balance of payments deficits is going to prove inflationary and so turn into the first of Mr Roubini's options. I am not sure that the danger of inflation is real. But Germans certainly fear it is.

Hans-Werner Sinn, the CEO of CESifo, claims that the ECB is conducting a secret bailout strategy that is utterly dangerous for the stability of the eurozone and is doing harm to the German economy. Martin Wolf and Felix Salmon have accepted his thesis. However, it is plainly wrong.

In the long term, the first and last of Mr Roubini's options seem most likely: either the entire eurozone adjusts, or it breaks up. Germany should accept the risks of the former path. I know that its nightmare is the hyperinflation of 1923. Yet the brutal austerity of 1930-32 finally brought Adolf Hitler to power.

The question is whether exit would be feasible without blowing up the world. Start with a decision that, for a severely uncompetitive country, such as Greece, exit would be co-operative. Greece would introduce a currency - the "new drachma". New contracts executed under Greek law and taxes and spending in Greece would be in this currency. Existing contracts would stay in euros. Banks would have legacy euro accounts and new drachma accounts. The exchange rate of the new currency against the euro would be set in the market. It would depreciate rapidly. But that is desperately needed.