sábado, 9 de noviembre de 2013

sábado, noviembre 09, 2013

Italy to join deflation club?

By Ambrose Evans-Pritchard

Last updated: November 7th, 2013


Jonathan Tepper from Variant Perception has a scary note this morning on Italy's deflation risk, just in time for the ECB's pitched battle today.

Or at least one assumes that there will be blood on the floor in Frankfurt as doves show their fangs (excuse the grotesque mixed metaphor). If there is not a bloodbath given how far the ECB has undershot its inflation and M3 targets, then why not?

The first chart shows falling inflation. The underlying rate after austerity taxes are stripped out is even worse.
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The second shows the debt trajectory. They are linked of course. One is a function of the other. When you understood this elementary point, you understand the essence of the EMU crisis. Berlin feigns not to understand it.



This is the denominator effect. The lower the inflation rate in Italy, the worse the debt trajectory, ceteris paribus. We already knew that Greece and Spain were in pre-deflation. Italy raises the stakes.

And no, Italy is a not a fiscal sinner. It has been a fiscal saint for years. It now has a primary budget surplus of 2.5pc of GDP. The Italian drama is not a morality tale. It is tale about the mathematics of debt deflation.

From Variant:
Falling wages perpetuate the deflationary dynamic, which becomes more pernicious and further entrenched the longer it persists. 
The real value of debt grows with deflation. Italy went into the crisis with a high government debt-to-GDP ratio, and this only continues to grow at an alarming rate. It will not be long before investors begin to notice and deduce the endgame, at which point ~4 per cent yields on Italian government debt will look egregiously mispriced. 
With debt unsustainably high in Italy; deflation eroding growth; and an encumbered banking system less able to provide support in anticipation of the ECB’s Asset Quality Review, Italy’s eligibility to access funding markets will come into question again. This leaves either a debt restructuring, or a change in course by the ECBentailing large purchases of Italian debt – the most likely attempted resolutions.

Exactly, how about a change in course by the ECB?

But don't raise the tactless question of why this is not happening. I for one will throw an emotional tantrum and start uttering unacceptably rude things about a large country in Northern Europe.

One must be polite. I genuinely admire Mario Draghi. I wish he was in charge of the European Central Bank.

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