Knight Reading

by CC July 10, 2011 9:46 pm • Commentary


Monday: Alcoa rings in the earnings season, as was commanded by Yahweh centuries ago.

Tuesday: The NFIB reports on small-business optimism, or the lack thereof. We find out about how wide the trade gap was in May. Get your 3-year notes here, yells the Treasury Department.

Wednesday: We get import and export prices for June. Treasury slings some hot 10-year notes your way. Ben Bernanke sings his Humphrey Hawkins song of woe in the House. Marriott and Yum Brands are among your quarterly earnings reports, establishing how much time we spent last quarter drowning our sorrows in hotel rooms with fast food.

Thursday: Oy, such a busy econ day. Here come the jobless claims. Was the June jobs report a fluke? Also the May jobs report? Jobless claims will give us a hint. We get producer prices for June. We get retail sales for June. Both are expected to decline from May.  Ben Bernanke trudges to the Senate to deliver the same report and hear the same inane questions and deliver the same non-answers as on Wednesday. Who let the 30-year bonds out? Treasury did. Boom goes the big earnings dynamite: Google? J.P. Morgan? Crazy times.

Friday: Another wild econ day. Empire State manufacturing data are due. Remember, this reading scared the heck out of everybody last month before ISM made them all feel better. We also get CPI and industrial production for June. Prices are expected to be down, production to be up. And we get Michigan sentiment data for July. Citigroup‘s got some earnings for you. You can read them or not, no pressure.


LONDON — With fears growing that Italy could become the latest victim of the euro zone’s sovereign debt crisis, and with plans for a second Greek bailout deadlocked, top European officials are to meet on Monday to wrestle with the mounting threats to the currency union.

Euro zone finance ministers had previously scheduled two days of talks to begin on Monday afternoon in Brussels. Over the weekend, a meeting of more senior officials was also set for Monday morning.

A spokesman for Herman Van Rompuy, the president of the European Council, denied that the senior officials would discuss the market’s fears about the precarious state of Italy’s finances. But another official, who requested anonymity because he was not authorized to speak publicly, said Italy would most likely be on the agenda.

On Friday, the spread of 10-year Italian government bond yields over their German equivalents widened to 236 basis points, the most since the introduction of the euro, and the country’s blue-chip stock market index, the FTSE MIB, fell by 3.5 percent. Investors were unnerved by evidence of a growing divide between the Italian prime minister, Silvio Berlusconi, and the finance minister, Giulio Tremonti.

Meanwhile, the impasse over plans to involve the private sector in a second Greek bailout seemed certain to dominate the broader meeting of finance ministers later Monday.


“The basic goal is to reduce the debt burden of Greece both through actions of the private sector and the public sector,” said one senior European official involved in negotiations.

Officials cautioned the new tack was still in the early stages, and final details were not expected until late summer. But if the strategy were agreed, it would mark a significant shift in the 18-month struggle to contain the eurozone debt crisis.

Until now, European leaders have been reluctant to back any plan categorised as a default for fear it could lead to a flight by investors from all bonds issued by peripheral eurozone countries – including Italy and Spain, the eurozone’s third and fourth largest economies.

Yields on Italian bonds, which move inversely to prices, rose sharply last week due to the Greek uncertainty. Senior European leaders – including Jean-Claude Trichet, European Central Bank chief, and Jean-Claude Junker, head of the euro group – are to meet top European Union officials ahead of Monday’s finance ministers’ gathering amidst growing fears of contagion.

A German-led group of creditor countries has for weeks been attempting to get “voluntary” help from private bondholders to delay repayment of Greek bonds, a move they hoped would lower Greece’s overall debt while avoiding a default.

But in recent days, debt rating agencies warned any attempt to get bondholders to participate would represent a selective default. Rather than abandon bondholder buy-ins, however, several European leaders have decided to return to a German-backed plan to push current Greek debt holders to swap their holdings for new, longer-maturing bonds.

The move essentially scraps a French proposal unveiled last month, which many analysts believed would only add to Greek debt levels by offering expensive incentives for banks that hold Greek debt to roll over their maturing bonds.


If you are a euro optimist, you might believe that the day of reckoning for Greece will be stalled long enough for Portugal, Ireland, Spain and possibly Italy and Belgium to recapitalize their banks and trim their government budgets. You might believe that of the Greeks will eventually default, but that by the time the contagion effects are checked, the Greeks will have pulled in some aid, and the global impact will be a mere hiccup instead of a new financial crisis. But that still will leave Greece with no clear economic path forward. For a best-case scenario, that’s not very good.

If you are a pessimist, you might see such a response as an unworkable plan of naïve technocrats. Here’s your line of reasoning: At some point along the way, democracy is likely to intervene: either Greek voters will refuse further austerity and foreign domination, or voters from northern Europe will send a clear electoral message that they don’t support bailouts. And there’s a good chance one or both of those events will happen before a broader European bank recapitalization can be achieved. In the meantime, who wants to put extra capital into those ailing Irish, Portuguese, and Spanish banks anyway?

In an even bleaker scenario, bank recapitalization won’t be realized anytime soon and those same economies will show few signs of growing out of their debts. A broader financial crash will result, and it won’t be contained by an easily affordable bailout.