“Italy Is Now the Biggest Story in the World,” says Kevin Drum. And he’s not talking about Joe Paterno (whose story I confess to having spent a lot more time following lately than Italy’s). But this is bad: another Eurozone country with a high debt/GDP ratio, soaring interest rates on its government debt, and no currency of its own that could depreciate to revive net exports, and no central bank of its own to expand the supply of credit. Just like Greece, except that Italy’s economy is about six times as large. It’s the fourth-largest economy in all of Europe, in fact.
For months people have been nervously watching Europe’s toxic cauldron of economic depression, austerity, sovereign debt crises, and bank funding problems (verging on crisis), and wondering if and when Europe’s problems might lead to a double-dip recession (or, as I’d call it, a recession within a depression, a la 1937). I wonder if someone else has already written the headline “Italy: Waiting for the Other Boot to Drop” yet.
P.S. If you’ve never heard the expression “Mingya!” then you obviously don’t live in Oswego. The Urban Dictionary will set you straight.
Yes, I think it did. As of 2:53 pm, the yield on ten-year Treasuries has plunged 20 basis points to an ultra-low 2.36%, their lowest level of the year. It’s the stock markets that are a bloodbath today, with the S&P 500 and Nasdaq down about 6%. Prices for the safe havens of gold and Treasury bonds are both way up. Inasmuch as the S&P downgrade has upped the fear factor, it’s hurt stocks and helped T-bonds.
To qualify this: The S&P’s role here has likely been vastly overstated by the media. (Krugman has already lost his lunch over this one, so I don’t have to.) For starters, when U.S. markets opened this morning, the T-bond market didn’t show much of a reaction either way (down just 2 basis points in the late morning, i.e., basically unchanged) and the stock markets’ initial tumble was not out of line with what they’d been doing the past two weeks (the S&P 500 fell almost 11%), going into the weekend. The snowballing of money out of the stock market and into the T-bond market is something that happened later in the day, not a plausible initial reaction to the downgrade. But plausibly the downgrade added to the general climate of fear, which got a lot more heated by the afternoon, so . . . it still seems that agent 6373 has accomplished her mission.
Many commentators have said that the unfolding crises in Italy, Spain, and the European Central Bank are both more dire and more unpredictable than the revelation that Washington is so dysfunctional that even a disgraced ratings agency thinks so. The weekend’s bigger announcement may have been that of ECB President Jean-Claude Trichet that the ECB would try to alleviate Italy’s and Spain’s debt crises by buying up huge chunks of their debt. Otherwise known as monetizing the debt, the modern-day equivalent of printing money to pay the bills.* The announcement seems to have helped Italy’s and Spain’s sovereign debt markets a bit, as interest rates on those bonds fell slightly, but it casts doubts on the ECB’s credibility as a tough-minded central bank that doesn’t go around picking up the tab for member countries’ large debts.
* You might ask: Doesn’t the Federal Reserve do the same thing when it buys U.S. Treasury bills, notes, and bonds as part of its open market operations and “quantitative easing”? Not quite, though it does count as monetizing the debt. The big difference is that the Fed, with a few distant exceptions like during the world wars, does not try to buy up U.S. government debt just to help out the government. (Will they still be so above the fray if and when hardly anybody wants to buy U.S. Treasuries? I’ll leave that one for my libertarian commenters.)
Blogging Through the Wreckage 