The next crisis triggers go off

Yesterday, Nick O’Connor took you through my predictions about Italy that have come true. I called them “crisis triggers”. And so far, they’ve proven accurate.

Two more clicked into place overnight. Which means the potential for a market crash is higher than it has ever been.

Higher than when I warned of the May bond crash in April. And higher than the September stockmarket crash I warned about two weeks before it began.

With Zero Hour Alert subscribers already sitting pretty, I can reveal a little more to you here.
The first crisis trigger that popped up overnight is capital flight. Here’s what I wrote to Zero Hour Alert subscribers in mid-June:

If the Target2 balances continue to escalate and capital flight is confirmed by Italian bank deposits, the Italian government might take the drastic step of imposing capital controls. Money would no longer be allowed to escape Italy. This would be the beginning of the end.

Italy’s Target2 liabilities hit a new record in February, May and June, but dipped in July.

And yet, there is evidence that capital flight out of Italy is taking place. It’s just that German banks aren’t safe enough any more. Presumably because they’re in the eurozone too. So the capital flight isn’t showing up in Target2, which only handles eurozone capital flows.

Ambrose Evans-Pritchard has the details of where the capital flight is showing up instead in the Telegraph:

Nervous Italians are starting to funnel money across the border into Switzerland, worried that an epic clash with the EU could set off a Greek-style banking crisis and a slide towards default.

“There is fear creeping in,” said Massimo Gionso, head of family wealth managers CFO Sim in Milan.

“People are concerned that if we get into the same situation as Greece, they might find the banks are closed and they can take out only €50 a day from cash machines. They don’t want to risk it,” he told the Daily Telegraph.

[…] The big players have already got their money out,” he said.

Mr Gionso said this capital flight has nothing to do with tax evasion. The authorities are notified and all transactions are above board. It is linked to fears of euro break-up as the insurgent Lega-Five Star government tears up the eurozone fiscal rulebook.

So the capital flight I predicted is confirmed.

And as surreal as it may seem, Italians are afraid capital controls come next. As they did in Greece and Cyprus.

I personally met a few Greek and Cypriot students who were stung by the cash withdrawal limits imposed there. One in Greece lost out on a scholarship to study in the United States because he was unable to pay a fee when the Greek banking system shut up shop.

Another told me how grandparents in his community had rescued their families. They revealed stacks of euros literally hidden under their mattresses. Some people knew not to trust the politicians and bankers from experience.

The trouble with capital controls is that Italy is a major economy and trading nation. And capital controls tend to work both ways. If you can’t get your money out, why put your money in?

The aim of imposing capital controls is to buy time. But in Italy’s case, time for what? A departure from the euro perhaps?

Capital controls would also trash another of Europe’s four freedoms. Not that anyone would be surprised by this any more.

The EU has become rather unpopular among its citizens. The Friends of Europe think tank did a survey of 11,000 Europeans in September. Two-thirds did not think life would be any worse without the EU, and 49% see the EU as “irrelevant”.

Some individuals disagree. Get a load of this from EU foreign policy chief Federica Mogherini:

“Close your eyes and imagine for one moment the European Union disappeared from the global scene right now. Let us say for a month, or a week, even for a few days. The world would simply collapse.”

The depths of delusion are escalating at the EU. Because they have to for bureaucrats to stay self-important.

But European the electorate is waking up. And elections are due in May.

The ball is in the EU’s court

The second crisis trigger that went active last night is Italy’s budget.

Not the budget projections that sent markets reeling the last few weeks, as I warned about mid-September. This time, the Italian cabinet had to hash out the actual details of the budget.

Late last night, the Italians sent off their budget to the EU for approval. That’s right, the EU gets a look before the Italian Parliament…

The reluctant Finance Minister Giovanni Tria now has to persuade the EU Commission to approve the violation of its own rules. “The idea that this budget will blow up Europe is totally unfounded,” he said according to the Financial Times.

The European Commission President Jean-Claude Juncker disagrees: “If Italy wants further special treatment, that would mean the end of the euro. So you have to be very strict.”

At this point, there is no way out. The markets, the EU and the Italian coalition government are in an extraordinary stalemate.

There is no compromise budget that keeps them all happy. Even the European Central Banker is hamstrung thanks to new rules that make it subservient to the EU. Italy’s government can’t get a bailout without surrendering the mandate it was elected on.

The real question now is whether my assertion is correct: Italians believe they have already tried the EU’s way of doing things. And it hasn’t worked. They demand not to be treated like Greece because they already have been since the euro began.

The Italians are ahead of Greece, not following in Greek footsteps. And that is why an Italian default and departure from the euro is so likely.

If that sounds shocking to you, consider it’s happened plenty of times before. Europe’s history of monetary unions tend to feature Italian departures in their final chapters.

History doesn’t repeat itself. But it often features Italian fiscal debacles.

Until next time,

Nick Hubble
Capital & Conflict

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