Stocks surged in a mid-morning to early-afternoon ramp on news the ECB will step in to buy Italian bonds and that Italy has agreed to balance its budget by 2013.

Please consider Italy pledges to balance budget by 2013, make balanced budget a constitutional requirement

Italy is pledging to work for a constitutional amendment requiring the government to balance its budget as Rome feverishly tries to assure domestic and foreign investors its finances are sound and calm nervous market.

Finance Minister Giulio Tremonti also told a hastily convened news conference Friday night that Italy aims to balance its budget in 2013, a year before previously scheduled. Premier Silvio Berlusconi, saying he conferred with world leaders, announced that G-7 finance ministers will meet “within days” of the exploding financial crisis.

Analysts at Rabobank International called the current fund “hugely inadequate” to cover Italy and Spain, not least because it would lose the pro-rated contributions those countries make if they needed to be bailed out with loans.

They calculated the fund would need euro665 billion ($941 billion) to cover Italy’s funding needs for three years.

The EU’s Monetary Affairs Commissioner Olli Rehn returned to Brussels in an attempt to shore up investor confidence following the recent spike up in the two countries’ borrowing costs.

“Such dramatic changes in the markets are incomprehensible,” Rehn said. “It is not as if the fundamentals of the Italian or Spanish economies have changed overnight.”

He reiterated previous calls to increase the capacity of the bailout fund and said recently agreed changes to the fund’s powers should be ratified by all governments by early September.

Dissent at ECB Wider than Reported

Via email from Barclays Capital Research

ECB round-up: reports suggest that there could have been as many as four dissenters to re-opening SMP purchases

Since yesterday’s disclosure by ECB President Trichet that the decision to re-activate sovereign debt purchases (the SMP) had not been “unanimous”, various reports have emerged concerning the likely dissenters, with reports this morning from Reuters, the FT and Dow Jones suggesting that there were three (or even four, based on the Reuters report), out of the 23 member Governing Council.

A Dow Jones report this morning cited “a person familiar with the matter” as saying that ECB Executive Board member J Stark had also opposed reactivating the SMP. This is interesting, for the usual procedure is for the ECB’s six person Board to agree a common line by a majority vote in advance of the Council meeting, and so it has been our understanding that dissent from officials on the Board is highly unusual. As well, the DJ report said that there was “at least one central bank from the Benelux region [who] also opposed restarting the SMP”.

I commented on the feud yesterday in Another Major Feud Between the German Central Bank and the ECB Over Resumption of Bond Purchases; Will Germany Leave the Euro?

Today we see the feud was wider than initially reported. We also see Trichet is going to do what he wants and a majority of the puppets are willing to go along. The key point is there is seldom as much dissent as we now see.

Questions Abound

  1. Will Mario Draghi, head of the central bank of Italy, carry as much influence over the board when he takes over from Jean-Claude Trichet in October?
  2. Can Italy really balance the budget?
  3. Will all the governments ratify the proposed changes to the Maastricht Treaty?
  4. What is the potential cost of this backstop?
  5. How many pledged has Trichet broken in the past 2 years? Does anyone have a count?

That is more questions than I have answers. Moreover, please note that changes to the Maastricht Treaty must be unanimous. Germany and Finland will be very reluctant at best. Germany’s constitution may need modification first. This is far messier than it looks, and it looks quite messy.

German Taxpayers on the Hook

Zero Hedge does a good job at question 4 in his post Explaining How The Just Announced ECB Market Rescue Pledged 133% Of German GDP To Cover All Of Europe’s Bad Debt

Basically what just happened an hour ago, is that the ECB gave a green light to use the SMP program to buy Italian and Spanish bonds. The problem is that the SMP’s unsterilized purchasing capacity is de-minimis and it is merely a stopgap until the sterilized EFSF is enacted in its final form.

The question is precisely what this final form will be: will it be €1.5 or €3.5 trillion? Nobody knows yet which is why Rehn refused to answer the question twice already today.

And here is where Germans get angry, because explicitly they end up backstopping everyone in Europe! And the cost to them becomes 133% of their entire economy in a worst case scenario, which of course in this centrally planned world, is now guaranteed.

So the ball is now basically in Germany’s court.

Ball in Germany’s Court

Without saying so explicitly, ZeroHedge just asked the question I asked yesterday: “Does Germany accept the monetization of foreign bonds at German taxpayer expense or does Germany leave the Euro?”

Mike “Mish” Shedlock
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