SCOREBOARD: Debt run

The eurozone countries are paying a high price in bond markets, but at least the debt sales are getting through with decent demand. Spain sold €3.5 billion of a 5.85 per cent 01/2022 bond at a yield of 6.97 per cent with a cover of 1.5, a fair slap from the last 10-year issue in October which had cover of 1.76 and went out at 5.43 per cent. France had a better run at it, issuing almost €7 billion at varying maturities and with decent cover.

It's not really what you'd call confidence-inspiring stuff though, and when you throw it in with growing reports of funding problems faced by European banks and the threat of sharp balance sheet reductions, then things aren't looking good.

Stocks on both sides of the Atlantic were weaker then and the Dax finished 1.1 per cent lower, the CAC was 1.8 per cent lower while the FTSE was down 1.6 per cent. In each case financials were one of the key dead-weights, although in the US basic materials (-3.3 per cent) and energy stocks (-2 per cent) were hit the most.

That's probably on account of the fairly sizeable falls in the commodity space. WTI was smashed and is currently off 3.4 per cent ($99.15), Brent is down 3.2 per cent ($108.3) while for metals, gold is down about $45 to $1720, silver is off 6.4 per cent and copper is down 3.3 per cent. Huge moves and we can't even blame it on a surging US dollar. The Australian dollar is off almost a big figure to 0.9998, sure, but the yen is at 76.969 from 77.03 and the euro is little changed at 1.3477. Sterling, for its part, is about 50 pips higher (1.5775).

Growth fears? Possibly, possibly, Europe is going down the gurgler, but then again growth data was good last night. US jobless claims for instance were down about 5,000 to 388,000 in the week to November 12, and US housing starts, having bounced 7.7 per cent (was 15 per cent) in September, only fell 0.3 per cent in October (expectations for -7 per cent). The Philly Fed index then fell to 3.6 in November from 8.7 (average 5). Looks to me like some stops may have been triggered following the Spanish bond auction then.

In any case, on Wall Street, the S&P500 closed down 1.7 per cent (1,216) with the Dow off 135 points (11,771), the Nasdaq down 2 per cent (2,588) and Australia's SPI 1.4 per cent lower so far (4,200).

US Treasuries then look to be getting a modest bid, the yield on the 5-year currently off 1bp to 0.87 per cent and the 10-year off 4bps to 1.96 per cent. The 2-year is actually up 2bps or so to 0.26 per cent while Australian futures are 4-5 ticks higher – the 3s at 96.74 and the 10s at 95.97.

That looks to be pretty much it. Just note that UK retail sales were much stronger than expected, rising by 0.6 per cent in October (with or without fuel) after a 0.6 per cent rise in the month prior. Expectations had been for sales to fall 0.3 per cent. European construction output then fell 1.3 per cent in September after a 0.4 per cent fall in August (was 0.2 per cent). There was a bunch of Fed speak with Dudley basically making the case for more easing, Bullard suggesting that the economy would have to deteriorate for more easing and Pianalto not really giving anything away (but said that monetary policy cannot cure economies' ills alone).

Now I got a few email queries about my grand plan for Italy to redistribute some of its debt to the private sector, which has comparatively low debt. First up, it's not a grand plan. I was simply highlighting why the ECB doesn't need to print and why, with a little political will, public debt could easily be reduced. Printing is ultimately a lazy and corrupt option for policymakers when the only thing lacking is political will. This is why Germany and the ECB are right in refusing to print money. Hopefully they will hold their ground.

Specifically then, Italian public debt is about €1.9 trillion or about 120 per cent of GDP. They probably need to reduce that to about 100 per cent to shut people up. Noting they wouldn't have to do it all in one year – let's say five years, for argument's sake – then that's a reduction of 4 per cent per year or about €95 billion per year assuming a balanced budget.

Now, admittedly the data is old, but in 2005, Italian households had €3.5 trillion in financial assets. Of that about €1.3 trillion were highly liquid – cash (€776 billion), currency (€73 billion), shares, foreign bonds etc. There is a further €5 trillion in real assets of which €3.8 are dwellings – the rest must be art, handbags, Lamborghinis and stuff.

As you can see, if the government charged a levy of €95 billion per year for four years, the amounts could easily be absorbed out of cash holdings or if citizens wanted, they could get very cheap loans at about 1 per cent and borrow the amount needed for the levy. At €95 billion each household would need to raise a bit over €3000 per year. Now that's just an average. In reality you would means test etc or base it on wealth so that lower income houses might need to raise nothing or maybe €100 or whatever was fair. Apparently the top 10 per cent own 45 per cent of the wealth anyway – but you get my drift.

The reality is government would, in all likelihood, only need to announce a plan and maybe do it for a year or two till markets calmed down. They probably wouldn't even need to take it to completion.

Now this is just an outline remember, not a grand plan, but it's useful in highlighting just how easy it is to solve the 'problem'. More likely the government could use a combination of state asset sales, levies, taxes and structural reforms to raise the cash.

There, I just solved the European sovereign debt crisis and I haven't even had my breakfast yet. That's just how I roll.

The new Italian PM for his part has promised to clamp down on corruption, tax evasion and to liberalise the labour market. He also noted there was scope to cut the underground economy, which some estimate at 20 per cent of GDP. This is all good stuff. He went on to suggest he wants to reinstate a property tax, sell state assets, shrink the government and clamp down on political spending excess.

That's about it then – nothing out today for Australia and New Zealand and nothing much tonight, except German producer prices and Canadian CPI.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.