Notes From Underground: Back On the Floor

On Friday, Rick Santelli and I discussed the situation in Europe, especially the FRAGILE situation in Italy. An important metric that needs to be watched is the huge amount of sovereign debt that is “comfortably” sitting on the Italian banks’ balance sheets. Under BIS rules (and other global financial regulations) sovereign debt carries a ZERO RISK WEIGHTING, meaning that commercial banks can hold sovereign bonds and hold no reserves against such an asset class.The Italian banks have been the repository of their sovereign bonds, which makes them vulnerable to a rise in BTP yields as the price drops due to the political concerns involving the inability of FIVE STAR/LEGA to come to an agreement on an acceptable cabinet.

(Click on the image to watch me and Rick discuss the Italian situation)


Italian President Sergio Mattarella has forced a veto of the chosen economic minister, which will result in a new election. Will Italian sovereign yields continue to rise? The key question facing the Italian government is whether the ECB, under President Mario Draghi, does whatever it takes to support Italian debt or chooses to make an example of Five Star by backing off from ECB bond purchases and forcing Italian yields higher as a form of punishment. Draghi has a great deal at stake so we will monitor how this continues to play out. Fragile indeed!

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9 Responses to “Notes From Underground: Back On the Floor”

  1. Chicken Says:

    Certainly Draghi has an engraved dagger up his sleeve.

  2. Says:


    Isn’t the sovereign debt issue a general issue for European banks? Thanks for great analysis. Best. Phil

    Sent from my iPhone


    • yraharris Says:

      Phil–absolutely correct.The BIS regs about sovereign debt having a zero risk weighting is going to cause havoc for the european domestic banks.The Italian banks are sitting on massive potential losses which will result in an even greater need for debt restructuring which will provide for even greater deflationary fears

    • Chicken Says:

      They’re the current price leaser on my watch list.

  3. Mike Temple Says:


    This 20 minute video should send shivers up the spine of every risk manager globally.

    What is unfolding in Italy is simply the 3rd (and perhaps ugliest) chapter in the Brexit/Trump/Italian trilogy.

    The same raw populist spirit that said “f you” to the Establishment in The UK and the US is now at war with Brussels.

    If Draghi and Brussels choose to “teach Italy a lesson”, they may get far worse than they bargained. This will not be Greece. 5Star and Lega will not go quietly into the night.

    USD could be the biggest face ripping rally all year as Euro Possibly crumbles. But even bigger than that could be the huge deflationary impulse that Druckenmiller foresees.

    Equity markets are ignoring the now-lit fuse that is Italy. New elections may be months away which will only sow more fear and chaos as populist fever rises ever more violently.

    We like to talk about Trump and possibility of constitutional crisis. Italy might just sink the entire EU project. Just watch the video to see who the leaders of Lega and 5 Star are. They make Trump look like a statesman by comparison.

  4. Michael A Temple Says:

    In the movie, “The Karate Kid”, the old Japanese man said,
    “Wax on, Wax off”

    Today, it is “Risk On, Risk Off”

    The fact that Italy is officially rudderless and that the election is many months away only worsens the financial outlook as the markets will NOT wait for the next plebescite….Markets will price in the worst case because that is what markets do.

    Italian banks are now truly “dead men walking”….So, next up are counterparty risks/contagion as which European/global bank is going to NOT pull their trading lines/exposure to Italian banks.

    Merkel/Macron/Draghi are going to have to figure this out NOW, as the markets may not allow them to “debate” what to do.

    Risk On….Risk Off……What comes after Risk Off?

    Watch those “red” ED futures soar today, along with UST 10/30 yr

  5. Michael A Temple Says:

    Red Eurodollar futures are the biggest financial story/movement not highlighted by WSJ/Bloomberg etc.

    While US stocks are taking Italy in stride, USTs are hearing the dog whistle loud and clear.

    UST 10 year down to 2.80% while 30 yr blasted through 3% down to 2.97%.

    But Dec 2019/Mar2020 EDs have skyrocketed 20 tics today….That is up from last week’s net gain of 16 tics.

    The difference between July 2018/March 2020 ED futures is a paltry 40 bps….That means Mr Market is pricing in less than 2 full 25 bp Fed hikes AFTER the “done deal” hike here in June.

    Italy has yet to wash up on US shores and yet the most active ED futures contract today BY FAR is the Dec 2019 with over 1.1MM contracts traded.

    Assuming Fed hikes in June (almost a sure thing) and Italy further unravels next month, it is entirely possible that Powell may find himself dangerously BEHIND the curve and not ahead of it. In other words, the dot plot might be over after just the June hike….And given the current collapsed structure of the forward ED curve, September could most definitely be the last hike for this cycle.

  6. A.M. Look 5/29/18 | Says:

    […] If you read Yra you heard it in his voice this was coming. […]

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