Telegraph Reports Italy Needs to Rollover Record €62-Billion of Bonds in September; On September 7, German Court Rules on Bailouts

by Mike Shedlock

On September 7 Germany's top court to rule on euro bailouts.

The Karlsruhe-based Federal Constitutional Court will announce its verdict on September 7 at 4 a.m. EDT, it said in a statement on Tuesday.

The court is considering three lawsuits brought by six eurosceptic plaintiffs -- five academics and a lawmaker from the Bavarian sister party to Chancellor Angela Merkel's Christian Democrats -- against German-backed international bailout schemes for Greece, Ireland and Portugal.

The plaintiffs argue that the bailouts, which total 273 billion euros ($393 billion), violate property rights and other protections in the German and European constitutions, and break the "no-bailout" clause in the European Union's treaty, which says neither the EU nor member states should take on other governments' liabilities.

Legal experts believe the court is extremely unlikely to block Germany's participation in the multi-year bailouts, or in an additional 109 billion euro package of official aid for Greece that euro zone leaders announced last month.

However, many legal experts and some government sources say they expect the court to set conditions for German participation in future bailouts, perhaps giving the German parliament a bigger say in approving it. That makes the court's verdict key for the whole euro zone.

For example, the eight judges could require German contributions to the European Stability Mechanism, the planned regional bailout fund which will start operating in 2013, to be subject to a vote by Germany's parliament. Currently, this is not formally mandated.

Any changes, even parliamentary approval will leave the door open at a later date for saying enough is enough.

Biggest Ever Italian Bond Rollover in September

The Telegraph reports Italy needs to rollover €62-billion of bonds in September. The Globe and Mail claims €46-billion.

Either way, September will be a big month.

Please consider German endgame for EMU draws ever nearer.

Finance minister Wolfgang Schäuble could hardly have chosen a more toxic term than "Bevollmächtigung" or general enabling power when he requested blanket authority from the Bundestag for EU rescues, as if Weimar were so soon forgotten. He was roundly rebuffed.

You can feel the storm brewing in Germany. Within days of each other, President Christian Wulff accused the European Central Bank of going "far beyond" its mandate and subverting Article 123 of the Lisbon Treaty by shoring up insolvent states, and Bundesbank chief Jens Weidmann said bail-out policies had "completely gutted" the EU law.

Both believe the EU Project has taken a dangerous turn. Fiscal powers are slipping away to a supra-national body beyond sovereign control. "This strikes at the very core of our democracies. Decisions have to be made in parliament in a liberal democracy. That is where legitimacy lies," said Mr Wulff.

We will find out to what extent Germany’s constitutional court shares these fears when it rules this Wednesday on the legality of the EU rescue machinery, and delivers its verdict of life or death for monetary union.

The assumption this time is that the eight judges will insist on beefed up powers for the Bundestag, but will not disturb the existing nexus of bail-outs and bond purchases. That is the most likely outcome.

Whether they go any further is the existential question for EMU. If they rule that the permanent bail-out fund (ESM) after 2013 breaches treaty law, they will queer the pitch greatly since the viability of the current fund (EFSF) depends on a hand-over.

If they rule in any significant way that the EFSF itself breaches Lisbon’s `no bail-out’ clause, or even that Germany cannot participate until the Treaty is changed, market confidence in monetary union will collapse instantly.

Whatever the court does, the simmering revolt in the Bundestag over recent weeks lays bare the salient strategic fact that Germany is not about to embrace fiscal union or quadruple the EFSF to €2 trillion, as deemed necessary by City analysts and EU officials to stabilize Italy and Spain. Nor will it pay for a third Greek rescue.

The EU-IMF Troika left Athens abruptly on Friday, blaming Greece for failure to comply. The equal failure is the scorched-earth austerity policies imposed by the EU itself. Fiscal deflation cannot work in a rigid economy with a large trade deficit and a high debt stock. It ensures a Fisherite debt deflation spiral.

The IMF must know from its errors in Argentina a decade ago that Greece needs a 40pc devaluation and 50pc debt forgiveness to claw back to viability. Yet the EU has blocked both, and the Fund has until now acquiesced.

Needless to say, battered banks, insurance companies, and pension fund will not wait for further rounds of punishment. They know that Italy must redeem €14.6bn of debt this week and €62bn by the end of September, the highest ever in a single month. It must roll over €170bn by December.

The ECB can in theory hold the line by soaking up the entire public debt of Italy, the world’s third largest at €1.84 trillion. The question is whether it can plausibly act on such a theory when the president of EMU’s dominant power deems this to be illegal.

Troika Abruptly Walks Out of Talks in Athens

In case you missed it, last Friday Inspectors leave Greece after talks are suspended

THE STRUGGLE to keep the ailing Greek economy afloat took a further turn for the worse as the EU-IMF “troika” abruptly suspended talks in Athens on the release of the next round of rescue aid to the country.

A team of troika inspectors unexpectedly left Greece yesterday after the emergence of divisions with the government over the execution of reforms agreed in its first international bailout.

With the release of each round of bailout loans contingent on the delivery of agreed reforms, the latest breakdown raises fresh questions about the government’s capacity to implement the rescue plan.

The dispute comes as Greece tries to persuade private creditors to bear investment losses as a condition of its second bailout. The terms of the second rescue were finalised in July after months of dispute which intensified the sovereign debt crisis.

With Italy and Spain under pressure, the latest turmoil in Athens unsettled bond markets yet again. Greek two-year bond yields soared to a new record of more than 46 per cent and Italian and Spanish borrowing costs also rose.

The troika – comprising the EU Commission, the ECB and the IMF – sent an inspection team to Athens a fortnight ago for the fifth quarterly review of the first Greek rescue. Top officials from the three institutions joined talks with Greek ministers on Monday but the deadlock persists.

“At a certain point you reach the conclusion that there is no point in having new meetings every day – and you leave the Greeks a chance to do their homework,” said a source close the troika.

At issue is the Greek government’s failure to deliver promised reforms to public sector pay and its tax collection system. The troika is also unhappy with the government’s failure to liberalise a number of professions.

Although the IMF had hoped to wrap up the talks next Monday, the troika said yesterday that its inspectors now expected to return to Greece by the middle of the month. It wants Athens to complete technical work by then and to continue talks on policies needed to complete the review.

Can Italy rollover debt without help from the ECB? I highly doubt it, but we are about to find out.

There is lots of Eurozone action in September, that's for sure.

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