Eurozone, Italy and interest rates

[Palfrem]

Gents

I know we have a number of knowledgeable financial types here so...

Very simplistically, if Italy now has to pay some 7% on its loans, any idea why my bank is only paying me 2.75%? That's a huge spread.

I assume some of my hard earned deposited cash is now effectively propping up Johnny Foreigner and the banks do carry a small risk of Italy (and others) thumbing their Roman noses to the debt in a few years time, but someone must be making some cash here and it's not me (us).

Who is making money in all this please?

Will EU governments collectively tax the ar$e of them soon so the money flows back to government coffers?

 

[Dryce]

Gents
Very simplistically, if Italy now has to pay some 7% on its loans, any idea why my bank is only paying me 2.75%? That's a huge spread.

In principle because your money isn't at much risk. Whereas somebody lending money to Italy is worried that (a) they might not get it back, or (b) they'll get it back reduced in value because of a currency switch.

Who is making money in all this please?

Generally the banks. Except they're still playing the funny money game.

Will EU governments collectively tax the ar$e of them soon so the money flows back to government coffers?

Rather than taxation there needs to be a change to accounting and regulatory practices IMO.

 

[DITTRICH]

Italy's rates have only shot up recently because they had to come to the market and auction some bonds. The idea is to drive up the yields of existing debt in order to get the newer debt cheaper. It's still risky though. When you understand that the Greek deal involves privately (read bank, hedge fund, pension fund, private investor) held debt being written off 50% yet the Greek debt held by the ECB not being written off by any percentage, then you know that the ECB cannot afford to write off 50% of the Greek debt they hold. French and German banks hold far too much Greek debt and that's why their shares are being hammered. If the Greeks play ball and approve the package, then the Greek's total debt might fall by 20%. Alot of people think that reduction is not enough. Italy's public spending hasn't been curbed yet so their debt is still climbing. Risk is increasing and yields are climbing higher.
Frankly, I don't think the Greek's have a chance of paying back anything. Nor do the Italians. They should all operate a cash economy without public services. Their governments should not be allowed to borrow money full stop.
As Howard always says "We're doomed I tell you"...

 

[davethemus]

I assume some of my hard earned deposited cash is now effectively propping up Johnny Foreigner and the banks do carry a small risk of Italy (and others)

it's not actually the countries that are bankrupt. It's the banks that lent to Italy that don't have enough cash to cover there loses, they're insolvent. However, the PIGS are in an unusual position, normally a country would devalue there currency and inflate there way out of debt, but here the dogmatic politicians wont let these sovereign have there own currency, therefore they are trapped.

However, regarding the shocking return on deposits in the UK, it's the Bank of England's fault, they keep interest rates at 0.5% giving the banks almost free money to speculate with at the same time condemning savers to terrible returns while inflation reduces the value of those savings.

There has been a financial war going on for a few years now. Speculators vs Savers.

 

[clever dicky]

What makes me laugh {mad} is not that any one is spending that much more, but the cost to borrow has just gone up.

Should've got a fixed rate deal.

This fiasco cant continue can it !

 

[clever dicky]

Far be it for me to suggest an idea that might help them out, but in simple terms they could just float each countries euro at different rates. Fr-euro, Gr-euro, It-euro and so on. All they need do is print new notes. Easy

 

[Scott_F]

Nor do the Italians. They should all operate a cash economy without public services. Their governments should not be allowed to borrow money full stop.

So go back to the Middle Ages with no schools, health service, police etc. ?

I suppose the resulting social meltdown will make their current economic woes seem unimportant.

 

[clever dicky]

Life would be a lot easier if everyone worked for nothing.

Anyone seen the new film Time-Limit yet. ? Now THAT's a good system.

 

[Nik_Endeavour]

An interesting point someone made on a similar discussion somewhere else (BBC i think) is that Italy only needs to borrow to pay old debt and interests of it because they do not run that much of a deficit.

Why doesn't Italy renegotiate the debt with its creditors (of the old debt) with very clear objectives? Either they restructure the debt and possibly postpone paying it by 5-10 years or the 50% haircut they got from Greece's debt will look pale to an Italian all out default.

I am sure central bankers and politicians can find a more elegant way of putting it but its a very simple solution.

 

[finisterre]

I am not really worrying.

As far as I can tell- reading between the lines of several reports.

I *think*

The ECB could print all the Euros needed to devalue the currency and inflate the debt away while making imports more expensive and business more competitive globally but the Germans are agin because they have a big pile of cash and don't want to see it devalued.

At some point the recession will cost the Germans more than the devaluation so they will crack. They are also taking a strong line because they do not want to be part of a downwardly spiralling economy-- it is necessary that they teach us a lesson so that it doesn't happen again.

Once our painful and personally very unpleasant lessons have been fully absorbed they will let the ECB off the leash and lose much of their wealth.

They deserved better from the European political establishment and I don't blame them for being cross.

(I am not an economist but it makes sense to me)

 

[Dryce]

At some point the recession will cost the Germans more than the devaluation so they will crack. They are also taking a strong line because they do not want to be part of a downwardly spiralling economy-- it is necessary that they teach us a lesson so that it doesn't happen again.

Maybe a solution is for Germany to leave the Euro and then leave the Euro to find it's own level.

That might well be more orderly than Greece and perhaps Italy being spat out of the Euro.

 

[crockers]

All this has proven that a common currency is hard to be viable without a common fiscal policy.
For it to survive some serious changes are needed.

 

[Palfrem]

Far be it for me to suggest an idea that might help them out, but in simple terms they could just float each countries euro at different rates. Fr-euro, Gr-euro, It-euro and so on. All they need do is print new notes. Easy

As in Franc, DMark, Drachma and Lira? You know, it could just work.

 

[clever dicky]

you still have to pander to their ego's.

 

[Nik_Endeavour]

No point crying on who fiddled what expenses where and who was stupid enough to lend to a broke Greece in the first place.

There are very brutal but efficient solutions that would not impact much of the world if politicials without vetted interests made some decision.


1. Let Greece default. They cannot be saved and they cannot afford that life style and mor importantly cannot ever payback. Banks and investors whinge about losing money (which they electronically created) and but forget to mention that for 10 years having creaming interests on these bonds. Like a bad gambler they are only happy when they are winning but when they get a bad hand they cry foul. Greece cannot afford to pay for itself even it had no debt. Their deficit is too great and tax income too little. Greece should be booted out of the Euro and the EU until they can sort themselves.

Croatia, the Cetzh Republic and Slovakia jumped through a lot more hoops than Greece and Croatia is not in the EU, and Cetzch Republic is not in the Eurozone.

More so Greece is not a real economy. You cannot grow and pay your debt with feta cheese and tourism.


2. Italy is solvent. If they didn't have any outstanding debt from about 2 decades ago they have a good balanced budget with more income than expenditure. The Italian government should renegotiate the loan repayments with full support of the EU and IMF and suspend them for an amount of years (2-5) until they return to growth. The markets or rather the system of high finance and greed has entrapped everyone and every country. Time to start standing up to it

 

[Stratman]

Shamelessly nicked off the Talk Photography forum, it gives a surprisingly clear explanation of what's happened.

Especially the last two paragraphs.

Helen is the proprietor of a bar in Detroit.

She realizes that virtually all of her customers are unemployed
alcoholics and, as such, can no longer afford to patronize her bar.

To solve this problem, she comes up with a new marketing plan that
allows her customers to drink now, but pay later.

Helen keeps track of the drinks consumed on a ledger (thereby granting
the customers' loans).

Word gets around about Helen's "drink now, pay later" marketing
strategy and, as a result, increasing numbers of customers flood into
Helen's bar. Soon she has the largest sales volume for any bar in
Detroit


By providing her customers freedom from immediate payment demands,
Helen gets no resistance when, at regular intervals, she substantially
increases her prices for wine and beer, the most consumed beverages.

Consequently, Helen's gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that
these customer debts constitute valuable future assets and increases
Helen's borrowing limit.

He sees no reason for any undue concern, since he has the debts of the
unemployed alcoholics as collateral!!!


At the bank's corporate headquarters, expert traders figure a way to
make huge commissions, and transform these customer loans into DRINK
BONDS.


These "securities" then are bundled and traded on international
securities markets.


Naive investors don't really understand that the securities being sold
to them as "AAA Secured Bonds" really are debts of unemployed
alcoholics. Nevertheless, the bond prices continuously climb!!!, and
the securities soon become the hottest-selling items for some of the
nation's leading brokerage houses.


One day, even though the bond prices still are climbing, a risk
manager at the original local bank decides that the time has come to
demand payment on the debts incurred by the drinkers at Helen's bar.
He so informs Helen.

Helen then demands payment from her alcoholic patrons, but being
unemployed alcoholics they cannot pay back their drinking debts.

Since Helen cannot fulfill her loan obligations she is forced into
bankruptcy. The bar closes and Helen's 11 employees lose their jobs.

Overnight, DRINK BOND prices drop by 90%.

The collapsed bond asset value destroys the bank's liquidity and
prevents it from issuing new loans, thus freezing credit and economic
activity in the community.

The suppliers of Helen's bar had granted her generous payment
extensions and had invested their firms' pension funds in the BOND
securities.


They find they are now faced with having to write off her bad debt and
with losing over 90% of the presumed value of the bonds.


Her wine supplier also claims bankruptcy, closing the doors on a
family business that had endured for three generations, her beer
supplier is taken over by a competitor, who immediately closes the
local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their
respective executives are saved and bailed out by a multibillion
dollar no-strings attached cash infusion from the government.

The funds required for this bailout are obtained by new taxes levied
on employed, middle-class, nondrinkers who have never been in Helen's
bar.

Now do you understand?

 

[WDB124066]

http://www.youtube.com/watch?v=Xl496xdAv94&feature=related

http://www.youtube.com/watch?v=W3QduVDjOLY&feature=related

The World Collapse - YouTube