Stock Markets Celebrate Italy Passing Austerity Budget

Includes: EWI
by: Acting Man

Stock markets around the world are celebrating the fact that Italy's senate actually managed to pass a budget, 'paving the way for Berlusconi's exit' as the newspaper wrote.

Our recently mentioned idea that an EU 'technocrat' would be likely be chosen to lead Greece's 'national unity' government (maybe we should rename it the 'national panic government', since the new prime minister is said to be forming a 'crisis cabinet') has indeed come to pass – former ECB governing board member Lucas Papademos did get the nod after all.

We have little doubt that Greek lawmakers got a few helpful hints from the eurocracy as to who they should settle on. Moreover, it became evident that it would be difficult to settle on a party political figure who would meet with the approval of all the participants to the negotiations.

We similarly expect that the man identified by the media as the most capable successor of the capricious and erratic Silvio Berlusconi will likewise be of the technocratic variety in the form of former EU commissioner Mario Monti.

In the context of 'technocrats' taking over, it should also be noted that the powers of Herman van Rompuy and Olli Rehn – both of whom have been recently 'kicked upstairs' in the eurocracy – have been increased considerably. Rehn is already busy waving the sanctions stick around with which he intends to beat fiscal offenders into submission as early as this December.

Olli Rehn warned Belgium, Cyprus, Hungary, Malta and Poland may be the first to get penalized under the EU's strengthened stability and growth pact set to come in force in mid-December.

Under the new rules, sanctions for countries that break the caps on budget deficits and debt levels become more automatic, in an effort to prevent a worsening of the debt crisis.

Rehn said "What we need now is unwavering implementation… I will start using the new rules of economic governance from day one.

If memory serves, 'unwavering implementation' of the rules, including the imposition of sanctions against fiscal offenders, were already part of the original 'Growth and Stability' pact. It didn't work the first time, why would it work now?

Yesterday Italian bond yields retreated again, ending the trading day a big 44 basis points lower at 6.44%. From a technical perspective this may not amount to much more than a retest of the recent breakout, so it is clearly too early to break out the champagne and put on the party hats, which of course doesn't keep stock market participants from doing just that (at the time of writing, the DJIA is up 270 points, on the heels of a rousing rally in European stock markets).

As the headlines in the media suggest, 'stocks rise on Italy hopes'. With regard to this we would point out that 'hope' is not an investment strategy.

The DAX rises slightly over 3% on the prospect of Italy's situation getting better – click for higher resolution.

Italy's MIB is up 3.81% following passing of Italy's new austerity budget by the senate – click for higher resolution.