Congratulations (of sorts) to Jean-Claude Juncker for not lying about what was said in emergency meetings with Italian Economy Minister. Juncker did not lie for the simple reason he did say anything of substance about the meeting.

Credit Crunch European Style

Inquiring minds are noting various details in a Reuters report EU says Euro area’s systemic capacity in doubt

European Commission President Jose Manuel Barroso said a surge in Italian and Spanish bond yields to 14-year highs was cause for deep concern and did not reflect the true state of the third and fourth largest economies in the currency area.

“In fact, the tensions in bond markets reflect a growing concern among investors about the systemic capacity of the euro area to respond to the evolving crisis,” Barroso said in a statement.

He urged member states to speed up parliamentary approval of crisis-fighting measures agreed at a July 21 summit meant to stop contagion from Greece, Ireland and Portugal, which have received EU/IMF bailouts, to larger European economies.

Italian Economy Minister Giulio Tremonti held two hours of emergency talks with the chairman of euro zone finance ministers, Jean-Claude Juncker, in Luxembourg but neither disclosed anything of substance after the meeting.

The euro zone’s rescue fund cannot use new powers granted at last month’s summit to buy bonds in the secondary market or give states precautionary credit lines until they are approved by national parliaments in late September at the earliest.

The European Central Bank could reactivate its bond-buying program, which temporarily steadied markets last year but has been dormant for more than four months. Weekly data released on Monday show it has so far refrained from doing so despite market rumors to the contrary last week.

Italy and Spain could offer new austerity measures to try to placate the markets, but Rome has just adopted a 48 billion euro savings package and Madrid’s lame duck government has just called an early general election for November 20.

Shares in banks exposed to euro zone sovereigns, particularly in Italy, have taken a hammering and are having growing difficulty in securing commercial funding.

“Bank funding remains stressed for southern Europe and remains a key source of risk for bank earnings, ability to lend and a drag on economic recovery,” Huw van Steenis, analyst at Morgan Stanley in London, said in a note. “The risk of a credit crunch in southern Europe is growing.”

Spanish and Italian bonds yields shot up to new record highs but are now a few basis points above yesterday’s close.

Both remain above 6% with Italy 10-year bonds currently at 6.09% and Spain at 6.25%. The highs were 6.26 and 6.42 respectively.

Gold hit another new high and currently sits up $29 at $1672 and silver surged a whopping $1.76 to $41.85.

No Reason for Alarm?!

In a clear use of the Jean-Claude Juncker theory to “lie when it gets serious”, a “German government spokesman said Berlin saw no reason for alarm over the selloff of Italian stocks and bonds and was focused on implement the latest euro zone summit decisions.”

Does anyone believe that?

Mike “Mish” Shedlock
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