Four days after the Italian elections, only one thing is really clear: A majority of Italian voters have rejected austerity.
The problem is, their victory came up short by the slimmest of margins.
0.36%.
That's the difference between a firm new government that could move Italy out of the Eurozone and the constitutional logjam Italian voters woke up to the next day.
Here’s why that's likely bad news for us all...
eurozone debt
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The Eurozone Hangs On By a Whisker
Berlusconi is Back, and So Is the Eurozone Debt Crisis
Since the beginning of the year, the markets have been behaving as if the Eurozone debt crisis has been magically solved.
Yields on Spanish and Italian debt are trading more than 1% lower than at their peak, while world stock markets have soared close to all-time highs.
Unfortunately, you can expect that all of this euphoria will fade when the Italian elections take place on February 23 and 24.
The reason is summed up in two words: Silvio Berlusconi.
Spain Squeezed by Eurozone Bailout Deal
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The move is part of an agreement Spain's Prime Minister Mariano Rajoy made when he accepted a Eurozone bailout for his country's ailing banking system. Rajoy surrendered to mounting pressure to at least make an effort to avoid a full state bailout.
"We have very little room to choose. I pledged to cut taxes and now I'm raising them. But the circumstances have changed and I have to accept them," Rajoy told the national parliament.
As protests erupted from anti-austerity crowds that gathered in Madrid, Rajoy explained plans to roll back social welfare protections and immediately raise taxes so that he could secure emergency aid and placate jittery investors.
Rajoy announced higher taxes and cuts to unemployment benefits, union pay, and civil service perks.
Amid boos and heckling, Rajoy told the parliament, "These measures are not pleasant, but they are necessary. Our public spending exceeds our income by tens of billion euros."
The moves highlight how Rajoy and Spain are at the mercy of the EU"s tough bailout provisions if the government hopes to get any more money for its struggling banks.
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Stock Market Today: Do You Own This 30% Winner?
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In a day when the U.S. markets closed at 1 p.m. positive economic reports on motor vehicle sales and factory orders sent the markets slightly higher, and one company was up more than 30%.
Factory orders for U.S. factories rose 0.7% which was the first increase in bookings in three months. Last month's revised figure showed a 0.7% drop and economists had expected a 0.1% increase for June.
Many major automakers reported increased sales with U.S. automakers Chrysler, Ford and GM leading the way.
With the market off tomorrow and a shortened day today, traders expect a subdued state until Friday's latest unemployment numbers are released.
The major news came from British banking empire Barclays PLC (NYSE ADR: BCS).
Barclays PLC (NYSE ADR: BCS) announced Tuesday that its CEO Robert Diamond would resign effective immediately in the wake of the scandal involving lending rate manipulation.
Barclays was fined $450 million last week by British and U.S. regulators and is among other banks involved in similar lawsuits concerning rate fixing during the financial crisis of the past four years.
British Chancellor George Osborne cheered the resignation of Diamond calling it the "right decision" and encouraged banks to move forward and continue lending.
"We need our banks to be focused on lending to the economy, not on the scandals of the past, and I hope this will be the first step towards a new culture of responsibility in British banking which is what the British people want to see," Osborne told BBC Radio 4's "Today" program.
Diamond, who became CEO on Jan. 1 2011, is set to face British lawmakers tomorrow for questioning. Barclays stock fell 16% on June 28 when the scandal broke and is down almost 2% today.
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Eurozone Debt Crisis Gets More Costly with Spain's Latest Move
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Madrid said it would detail exactly how much it needs following an independent audit report in a little over a week.
The decision to aid Spain came after a two-and-a-half-hour conference call with the finance ministers of the 17-member bloc. The substantial size was settled on to dispel any lingering doubts that the bailout wouldn't be big enough.
But a fix for Spain's banks may not be enough to save the whole country.
"This year is going to be a bad one, growth is going to be negative by 1.7%, and also unemployment is going to increase," Spanish Prime Minister Mariano Rajoy said Sunday.
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Why the Eurozone Debt Crisis Never Really Went Away
How many times have we been told the Eurozone debt crisis is resolved, only to have it turn up again like a bad penny?
Last year's string of good news/ bad news on the Eurozone debt crisis had the markets going up and down like a yo-yo until the routine grew so tiresome that most people stopped paying attention.
But while the crisis faded into the background, it never really went way.
Remedies that were sold as solutions haven't solved a thing.
The celebrated bailouts of countries like Portugal, Ireland, and especially Greece have served mainly to postpone real solutions that would be far more painful.
"The Eurozone politicians in their infinite wisdom have concluded that it is easier to prolong the agony than to take their medicine," said Money Morning Chief Investment strategist Keith Fitz-Gerald.
In fact, the Eurozone debt crisis is getting worse.
Collective debt among the 17 member nations is on the rise, having increased from 85.3% of GDP (gross domestic product) in 2010 to 87.2% last year. That's the highest level in the history of the Eurozone.
Unemployment in the Eurozone rose in March to 10.9%, up from 10.8% in February and 9.9% a year ago. Manufacturing also declined last month, as new orders fell for the 11th month in a row.
And the austerity imposed on the troubled PIIGS (Portugal, Ireland, Italy, Greece and Spain) to bring their budget deficits and debts under control have actually made the situation worse.
"It's done no good at all," Fitz-Gerald said of the Eurozone's efforts to deal with the debt crisis. "It's an absolute travesty."
The steep and sudden cuts in spending are pushing most of Europe back into a recession, which will eventually be felt here at home.
Last year's string of good news/ bad news on the Eurozone debt crisis had the markets going up and down like a yo-yo until the routine grew so tiresome that most people stopped paying attention.
But while the crisis faded into the background, it never really went way.
Remedies that were sold as solutions haven't solved a thing.
The celebrated bailouts of countries like Portugal, Ireland, and especially Greece have served mainly to postpone real solutions that would be far more painful.
"The Eurozone politicians in their infinite wisdom have concluded that it is easier to prolong the agony than to take their medicine," said Money Morning Chief Investment strategist Keith Fitz-Gerald.
In fact, the Eurozone debt crisis is getting worse.
Collective debt among the 17 member nations is on the rise, having increased from 85.3% of GDP (gross domestic product) in 2010 to 87.2% last year. That's the highest level in the history of the Eurozone.
Unemployment in the Eurozone rose in March to 10.9%, up from 10.8% in February and 9.9% a year ago. Manufacturing also declined last month, as new orders fell for the 11th month in a row.
And the austerity imposed on the troubled PIIGS (Portugal, Ireland, Italy, Greece and Spain) to bring their budget deficits and debts under control have actually made the situation worse.
"It's done no good at all," Fitz-Gerald said of the Eurozone's efforts to deal with the debt crisis. "It's an absolute travesty."
The steep and sudden cuts in spending are pushing most of Europe back into a recession, which will eventually be felt here at home.
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As Greek Debt Default Nears, Investors Need to Take Cover
At this point a Greek debt default is virtually unavoidable, and it could happen in a matter of weeks.
The ensuing chain reaction will upend markets around the world and will almost surely lead to more defaults among the European Union's (EU) other debt-plagued nations, collectively known as the PIIGS (Portugal, Ireland, Italy, Greece and Spain).
The bond markets have already passed sentence, with the yield on two-year Greek bonds spiking to an astronomical 76% yesterday (Tuesday). Yields on 10-year Greek bonds rose to 24%.
By comparison, the 10-year bond yields of another PIIGS nation, Italy, rose to 5.74%. Meanwhile, bond yields for the EU's strongest economy, Germany, have dropped below 2%.
The credit default swap (CDS) markets, where investors can insure their bond purchases against default, agree with the bond markets' verdict. As of Monday it cost $5.8 million and $100,000 annually to insure $10 million worth of Greek debt for five years, which means the CDS market now considers default a 98% probability.
Most European stock markets have been hammered over the past several weeks, with some dropping as much as 25%.
"Default is inevitable," said Money Morning Global Investment Strategist Martin Hutchinson. "Greeks are paid about twice as much as they should be, and that gap can't be solved by austerity."
Greece's budget deficit has increased 22% this year, while its economy is projected to shrink more than 5%.
Every new development appears to bring Greece closer to the brink of default - and some see that happening in the very near future.
"My guess is there will be a Greek debt default by the end of this fiscal quarter - yeah, that means very soon," said Money Morning Capital Waves Strategist Shah Gilani.
The ensuing chain reaction will upend markets around the world and will almost surely lead to more defaults among the European Union's (EU) other debt-plagued nations, collectively known as the PIIGS (Portugal, Ireland, Italy, Greece and Spain).
The bond markets have already passed sentence, with the yield on two-year Greek bonds spiking to an astronomical 76% yesterday (Tuesday). Yields on 10-year Greek bonds rose to 24%.
By comparison, the 10-year bond yields of another PIIGS nation, Italy, rose to 5.74%. Meanwhile, bond yields for the EU's strongest economy, Germany, have dropped below 2%.
The credit default swap (CDS) markets, where investors can insure their bond purchases against default, agree with the bond markets' verdict. As of Monday it cost $5.8 million and $100,000 annually to insure $10 million worth of Greek debt for five years, which means the CDS market now considers default a 98% probability.
Most European stock markets have been hammered over the past several weeks, with some dropping as much as 25%.
"Default is inevitable," said Money Morning Global Investment Strategist Martin Hutchinson. "Greeks are paid about twice as much as they should be, and that gap can't be solved by austerity."
How Soon is Now
In recent weeks Germany has shown more reluctance to dig deeper into its own pockets to bail out Greece and the other PIIGS. At the same time, Greece has struggled to implement the austerity measures that are required if it is to continue receiving aid from the European Central Bank (ECB) and the International Monetary Fund (IMF).Greece's budget deficit has increased 22% this year, while its economy is projected to shrink more than 5%.
Every new development appears to bring Greece closer to the brink of default - and some see that happening in the very near future.
"My guess is there will be a Greek debt default by the end of this fiscal quarter - yeah, that means very soon," said Money Morning Capital Waves Strategist Shah Gilani.
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Don't Look Now but the National Debt Could be $23 Trillion by 2021
There was a lot of back-patting in Washington this week after U.S. President Barack Obama signed a debt-ceiling deal that he and members of Congress claim will reduce the national debt.
But here's the truth: This deal does nothing to reduce America's debt burden. In fact, the $14 trillion we owe now could every easily exceed $23 trillion by 2021.
That's a 62% increase.
It only takes a little bit of number crunching to see what I mean.
The deal brokered by Congress cuts spending by just $917 billion over a 10-year period, with a special congressional committee assigned to find another $1.5 trillion in deficit savings by late November.
Even if you round up, that $2.5 trillion in "savings" over a 10-year period is inconsequential when you consider that President Obama added nearly $4 trillion to the national debt in just a few short years in office.
How can you make any progress on the debt front when you're adding $4 billion in new liabilities every day?
And the story is even worse than that: According to the Congressional Budget Office (CBO), even the $2.5 trillion the government claims to be saving is quickly vaporized by inflation and lost economic output.
The CBO projects the average growth rate from 2011 to 2016 will be 3.25%, and the non-partisan group has the average rate of inflation pegged at 1.55% over that same period.
However, growth in the first half of 2011was 0.8% and the personal consumption expenditures (PCE) inflation index - the type of inflation the CBO looks at - was 3.5%.
So let's do the math.
If growth and inflation statistics magically revert to CBO expectations - which would be a long shot considering how much they're already off - then the budget deficit over the next 10 years would rise by $928 billion. That alone is more than enough to wipe out the $917 billion of initial savings in the debt-ceiling bill.
But here's the truth: This deal does nothing to reduce America's debt burden. In fact, the $14 trillion we owe now could every easily exceed $23 trillion by 2021.
That's a 62% increase.
It only takes a little bit of number crunching to see what I mean.
The deal brokered by Congress cuts spending by just $917 billion over a 10-year period, with a special congressional committee assigned to find another $1.5 trillion in deficit savings by late November.
Even if you round up, that $2.5 trillion in "savings" over a 10-year period is inconsequential when you consider that President Obama added nearly $4 trillion to the national debt in just a few short years in office.
How can you make any progress on the debt front when you're adding $4 billion in new liabilities every day?
And the story is even worse than that: According to the Congressional Budget Office (CBO), even the $2.5 trillion the government claims to be saving is quickly vaporized by inflation and lost economic output.
CBO: Contrary to Barack Obama
The CBO in January estimated that a 0.1% reduction in growth rates would increase the deficit by $310 billion over the next 10 years, while a 1% increase in inflation rate would increase the deficit by $867 billion.The CBO projects the average growth rate from 2011 to 2016 will be 3.25%, and the non-partisan group has the average rate of inflation pegged at 1.55% over that same period.
However, growth in the first half of 2011was 0.8% and the personal consumption expenditures (PCE) inflation index - the type of inflation the CBO looks at - was 3.5%.
So let's do the math.
If growth and inflation statistics magically revert to CBO expectations - which would be a long shot considering how much they're already off - then the budget deficit over the next 10 years would rise by $928 billion. That alone is more than enough to wipe out the $917 billion of initial savings in the debt-ceiling bill.
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Does the Eurozone Have Its Own Lehman Bros?
Does the Eurozone have its own American International Group Inc. (NYSE: AIG), or worse, its own Lehman Bros. when it comes to Greece?
I believe it does.
Why else would the European Union have bent over backwards to "save" a member nation that: A) Accounts for 2.01% of the EU by trade volume; and B) Would essentially be like letting Montana go out of business - no offense to Montanans or Montana!
More to the point, if things really were under control, why would European Central Bank President Jean-Claude Trichet say that risk signals for financial stability in the euro area are flashing "red" as he did following a meeting of the European Systemic Risk Board in Frankfurt?
The short answer: Because he knows what the European banks are desperately trying to hide from the rest of the world - that there are still enormous risks and they're even more concentrated now than they were in 2008 at the start of the financial crisis.
I believe it does.
Why else would the European Union have bent over backwards to "save" a member nation that: A) Accounts for 2.01% of the EU by trade volume; and B) Would essentially be like letting Montana go out of business - no offense to Montanans or Montana!
More to the point, if things really were under control, why would European Central Bank President Jean-Claude Trichet say that risk signals for financial stability in the euro area are flashing "red" as he did following a meeting of the European Systemic Risk Board in Frankfurt?
The short answer: Because he knows what the European banks are desperately trying to hide from the rest of the world - that there are still enormous risks and they're even more concentrated now than they were in 2008 at the start of the financial crisis.
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