The Return of the Inquisition: Do you confess?

In 279 BC, the vast army of King Pyrrhus of Epirus was met by Roman forces at the Battle of Asculum in southern Italy, in what would be one of the costliest military engagements of ancient history.

Pyrrhus fancied himself the second coming of Alexander the Great and believed that he was a descendant of Achilles.

Many of his peers and contemporaries believed Pyrrhus to be the greatest military commander of all time.

His exploits were legendary. And when he set sail for Italy in 280 BC, the Romans did not underestimate him.

The Battle of Asculum was decisive. Pyrrhus actually won the battle; but in defeating the Romans, he lost so many of his men that his army was practically broken.

Pyrrhus purportedly said of his victory, “If we are victorious in one more battle with the Romans, we shall be utterly ruined. . .”

This gave rise to the term “Pyrrhic victory,” which refers to a win that’s incredibly costly.

Pyrrhus also tried his hand at diplomacy with Rome, sending one of his ablest statesmen to the capital to negotiate peace with the Roman Senate.

The emissary was not successful. But he reported back to Pyrrhus that Rome’s Senate was incredibly impressive– “an assembly of kings” comprised of its noblest citizens.

And he was right. In the early days when Rome was still a republic, its Senate was a highly revered institution that stood for wisdom, dignity, and virtue.

They were far from perfect. But the men who served in the Senate during the early republic were heavily responsible for building the most advanced civilization the world had ever seen up to that point.

Needless to say, times changed. Within a few hundred years, the Senate had become a corrupt joke, filled with venal criminals, weak sycophants, and mediocre minds.

I couldn’t help but think of this analogy yesterday watching the Inquisition of Brett Kavanaugh.

If you’re living under a rock (or reading this letter many years from now), Brett Kavanaugh has been nominated to serve as a Justice of the United States Supreme Court. This requires that he be confirmed by the Senate.

Recently a woman emerged who accused Kavanaugh of sexually assaulting her when they were all teenagers, several decades ago.

This is tantamount to accusing the man of a crime.

But rather than treat this as any other criminal matter in which the authorities would investigate the evidence to determine if charges are warranted… or the case is put to a court and jury to decide… the once-hallowed halls of the US Senate have been turned into an embarrassing circus that shines a giant spotlight on the deep social divides in the Land of the Free.

The whole charade is a horrible offense to the basic principles of justice in which a person is presumed to be innocent until proven guilty.

When it comes to claims of sexual assault, however, the man is automatically deemed guilty … and the accuser praised for her courage and bravery before the veracity of the assertion is ever deliberated.

Senator Maize Hirono of Hawaii recently stated, “Not only do women like [Kavanaugh’s accuser], who bravely come forward, need to be heard, but they need to be believed.”

By definition this is neither fair nor impartial, and turns the entire process into a Kangaroo Court… which is what the Senate has become.

At a certain point yesterday, one Senator introduced multiple pieces of evidence on behalf of the accuser, including ‘expert reports’ that justify her inability to remember details from the assault.

This is truly bizarre.

These Senators are playing the role of judge in this matter. It seems impossible to do this while simultaneously acting as advocate for the accuser.

Another Senator sat smugly and sanctimoniously, leering down at Brett Kavanaugh and demanding explanations about code words for beer and flatulence that date back to Kavanaugh’s high school days.

The fact that a United States Senator would actually consider this important evidence is an utter embarrassment.

Another disgusting perversion of justice is that the United States Senate actually felt compelled to negotiate with the accuser about when/how she would testify.

For example, the accuser wanted to prohibit certain questions, control who could/could not ask questions, determine the order of witness testimony, etc.

This is simply NOT how the justice system is supposed to work.

Accusers must face the accused in a court of law and submit to cross-examination, following the same rules that everyone else has to follow.

No one is supposed to get special treatment. That’s the point. And it is through this process that the truth is eventually discovered.

It’s not that I don’t believe the accuser. It’s entirely possible that she’s telling the truth.

But as this case has not been deliberated objectively through the normal due process that is guaranteed by the Constitution, no one can reach a valid conclusion.

Yet there are countless legions of people, including United States Senators, who have already made up their minds, like the Inquisition demanding, “Do you confess?”

And that’s the saddest part– this manner of Inquisition… trial by social media… has now been condoned and advanced by the United States Senate, an institution whose members have ALL taken a solemn oath to support and defend the Constitution which they are now violating in the worst way.

Clearly the Senate is no longer an assembly of kings… but a brood of bickering, immature weaklings.

(The only resilience displayed has been from the accused and accuser, both of whom have had to endure insane public scrutiny.)

There’s obviously an agenda here.

Perhaps some Senators are trying to win points with the #metoo movement for the upcoming elections.

Or they’re intentionally blocking Kavanaugh simply because he is a Trump nominee.

Whatever their reasons, they may be victorious in achieving their desired outcome.

But it will be a Pyrrhic victory… for it will come at the expense of establishing a dangerous new standard that destroys the most important principles of Justice.

Source

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The Kavanaugh Nomination Fight Has Pulled Us Further Into a Partisan Quagmire

Senate Republicans are moving ahead with voting on Brett Kavanaugh’s Supreme Court nomination; a floor vote could occur as soon as tomorrow.

Is this wise? Necessary? Or just another tactical partisan maneuver in a political era increasingly defined by them? My worry is that there is no good answer, and that because of how both parties have acted, we are hurtling toward a long-simmering crisis of institutional and political legitimacy that can no longer be avoided.

The case for proceeding quickly with a vote following yesterday’s sexual assault hearing goes something like this: Kavanaugh and his accuser, Christine Blasey Ford, both gave their testimonies and answered questions, and both came across as human and believable. While some questions remain about both of their stories—Is Kavanaugh being truthful about his teenage drinking? How did Ford get home after the evening in question?—it is likely that further investigation would not reveal much more than we already know, which includes sworn written statements from all the named parties said to be present on the night of the alleged assault. Perhaps Mark Judge, a Kavanaugh friend who Ford alleges was in the room at the time of the assault, could be compelled to testify and offer further details, but he has already denied recalling any such event under penalty of perjury, and if called he would most likely take the fifth, providing no new information. At this point what we know is what we are going to know, and however imperfect our knowledge is, it is all we are going to have. Senate Republicans should schedule a vote, and see what comes of it.

The case for postponing the vote, and perhaps withdrawing Kavanaugh’s nomination, is that in fact there is still more we could possibly learn: not only from Judge, but from, say, Ford’s parents and family, who have offered just a few terse statements of generic support, and could presumably provide recollections about her as a teenager. With further investigation, we might even learn more from Ford herself, who offered to speak with committee investigators and to sketch a floor plan of the house where she says the assault took place. Without falling down the rabbit hole of Google-maps enabled doppelganger theories, it would then presumably be possible to compare that sketch to the floor plans of the people she says were in attendance, which might provide a little more detail about the location of the alleged event than we have now. Speaking of details, more than a few people have expressed skepticism about Kavanaugh’s essentially innocent descriptions of some of the activities noted in his yearbook—”boofing,” “devil’s triangle,” “Renate alumni.” And then there is the calendar entry in Kavanaugh’s datebook that appears to describe a midsummer night of weekend drinking with friends, who include not only Judge but another individual who was reportedly dating Ford at the time. The prosecutor Republicans brought in to ask their questions touched on this entry briefly at yesterday’s hearing—but was then cut off by GOP lawmakers. There are simply too many unanswered questions, too much doubt about what did or did not happen, in this view, to move forward right now.

Compounding the matter are real questions of institutional legitimacy. Republicans spent much of yesterday attacking Democrats for their handling of Ford’s story: Ford was connected with her lawyer through Sen. Dianne Feinstein’s office prior to the allegations becoming public, Ford was unaware of GOP offers to interview her in California (presumably because her lawyers did not adequately relay that offer), and the eventual leak of the existence of the document that turned out to be Ford’s story most likely came from a Democratic source (although both Feinstein and the reporter on the initial story have denied it was her). Because Democrats mishandled the process in a manner designed to confer partisan advantage, many Republicans now argue that they have no choice but to move forward with a confirmation vote; to do otherwise would hand Democrats a victory for playing dirty pool, and to ensure that the nomination process is a poisonous, partisan free-for-all for a generation to come.

The Democratic rejoinder is that Republicans were the ones who escalated the nomination process wars when they refused to hold a vote on President Obama’s nominee, Merrick Garland. To move forward now, with so much outrage and uncertainty, would not only put an asterisk by Kavanaugh’s name and all his future decisions. Because of the large influence of any single Justice, especially one replacing the Court’s longtime swing vote, it would jeopardize the legitimacy of the entire court for years. Perhaps forever.

I find myself at least partially convinced by all of these arguments—and not completely satisfied by any of them. That is precisely the trouble.

Yes, Democrats mishandled Ford’s allegation, but now that it is public, their errors shouldn’t give Republicans a pass to simply hold a hearing, nod, and then proceed as planned. Yes, Republicans escalated the Senate’s procedural cold war with their tactical refusal to vote on Garland, but that doesn’t let Democrats off the hook for their own errors, strategic and otherwise. And yes, it would be helpful and good to know more about both Ford’s story and Kavanaugh’s teenage years, but even if we could, I am not at all sure, based on the bipartisan grandstanding in yesterday’s hearing and the overall tenor of the fight so far, that we actually would.

Which is to say that when it comes to Kavanaugh’s confirmation, there is no easy way to escape from on-the-one-hand, on-the-other-hand oblivion, no possibility of resolving the matter in a way that most parties deem fair and reasonable. There is no avoiding the presumption of bad faith.

So this will almost certainly be decided on the basis of raw, winner-take-all political power, for its own sake, rather than on anything that resembles an attempt at compromise, and it has already the stage for many more similarly ugly and degrading showdowns in the future. Regardless of the outcome, Kavanaugh’s nomination has pulled our nation further into the quagmire of crude partisan power politics. Welcome to the abyss.

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House Intel Committee Votes To Release 53 Trump-Russia Transcripts

The House Intelligence Committee on Friday voted to release 53 transcripts related to the panel’s Trump-Russia investigation, reports The Hill, “teeing up a massive document dump ahead of the November midterm elections.” 

The transcripts will include testimony from several current and former key members of Trump’s orbit, including Steve Bannon, Jared Kushner, Jeff Sessions, Donald Trump Jr., Roger Stone and Director of National Intelligence Dan Coats. 

Also included will be interviews with former Obama administration officials such as former Director of National Intelligence, James Clapper as well as former deputy Attorney General Sally Yates. 

The transcripts — 53 in total — will not immediately be released but will now go to the Office of the Director of National Intelligence for a classification review, which could take days or weeks to complete.

The documents are poised to revive discussion about the House panel’s Russia investigation, which dramatically broke down into partisan infighting and culminated in Republicans moving to end the probe in a party-line vote last March. Democrats have accused the GOP leaders of ending the probe prematurely. –The Hill

House GOP released a report on their findings in April which found no collusion between the Trump campaign and Russia.  

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Here’s The Reason Why Dollar Funding Costs Are Exploding

With the market’s attention yesterday focused on the historic Kavanaugh hearing, it is understandable that the biggest markets story slipped by largely unnoticed: as we noted yesterday morning, that was the sudden spike wider in various dollar basis swaps, amid what appeared to be a widespread, dollar shortage.

Specifically, the cost to hedge FX risk moved sharply higher for foreign investors that hedge USD corporate bond holdings by rolling 3-month FX forwards. On an annualized basis the 3-month hedging cost jumped 47bps to 318bps for JPY/USD and 23bps to 323bps for EUR/USD. As shown in the chart below, the one-day move in the 3 month EUR swap was the biggest since the financial crisis:

The move was broadbased, affecting not just one pair, but virtually every FX pair, confirming that there had been a sharp repricing of dollar liquidity into year-end.

So with Wall Street traders and analysts now back at their desks, and catching up on the key newsflow of the past 24 hours, the question has emerged: what caused it?

Today, Bank of America has provided an explanation for this sudden dollar shortage. According to BofA’s Yuri Seliger, the reason for these sudden increases is the fact that as of yesterday, the three-month FX forward contract extended over the year-end for the first time this year.

It spiked wider, i.e., became more expensive, because banks, and in particular foreign banks, make an effort to minimize their balance sheets on December 31st for regulatory reporting purposes.

As a result, according to BofA these FX hedging costs will likely remain elevated for the remainder of 2018 and normalize on the first day of the new year – a pattern that repeats every year (Figure 1, Figure 2).

Ok but why the far greater move in 2018 compared to years prior?

BofA has an explanation for that too, and it has to do with what changed this year, namely Trump’s tax policy: the increase in costs this year was larger than what we saw last year largely in part to less funding available from corporate investors, as US companies are repatriating their overseas cash. Similarly, hedging costs based on 1-month FX forwards should spike a month prior to the year-end before normalizing in January (Figure 3, Figure 4).

In other words, for all the concerns about a dollar funding shortage, it’s true… but only due to calendar reasons (even though today the various swaps have continued to leak wider). That said, should the blow out in dollar-hedging costs persist, and if it fails to renormalize on the first day of 2019, the question of just who is soaking up all the excess liquidity will certainly become topical once again.

 

 

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“We Have Really Lost Our Way” – Trader Laments Market’s Risk Ignorance

“BTFD”, “Goldilocks”, “Climbing a wall of worry”, “Powell Put”, “Trump Put”, “It’s different this time.”

The excuses to buy stocks – no matter what headline tape bomb explodes – grow longer and more desperate as asset-gatherers and commission-takers know the end is nigh (and judging by the level of insider-selling, so do C-level execs). Of course, to the onlookers, the record-breaking stock markets provide just the ‘price’ evidence that everything must be awesome (right?), but as former fund manager and FX trader Richard Breslow points out, “there’s danger in knowing price, but not value.”

The most accurate thing anyone has said today is also the scariest. Not because it isn’t true. There is no shortage of examples to prove it. Italian assets are getting hammered on budget-deficit-busting news. The European Union won’t like it. The rating companies may take exception. Our own story described it as dealing a “body blow” to the establishment. But Deputy Premier Matteo Salvini’s reaction was, “Markets will come to terms” with it. And that’s the problem. They most likely will.

Via Bloomberg,

But every time “investors,” to use the term loosely, limit their response to selling some futures before deciding to move on and pick-up some carry in the cash market, the ante will continue to be raised at the next episode.

Traders are meant to be regulators on behavior, economic as well as political, but have utterly ceded that function.

This is nothing new, but it’s getting worse. And more dangerous. As I’ve been watching the BTP and MIB markets trade this morning at each dead-cat bounce I’m told things are stabilizing. There’s no contagion. Buyers are looking for value. That markets are orderly.

And that’s good, but when I look again a bit later, prices are lower. I’m absolutely not advocating for any sort of mayhem. Just that we recognize things for what they are rather than check if the central bank is around to be front-run.

On the same day we are featuring an editorial worrying over the potential implications to the stability of Europe of the Italian government actually intending to deliver on their campaign promises, it took almost all night for EUR/CHF to finally take notice. And this in a cross that yesterday traded at one-month highs on fresh buying following multiple buy recommendations based on increasing political stability in… you guessed it: Italy.

I understand that surprises happen. And hindsight isn’t fair to club someone over the head with. But sometimes it is.

Just yesterday demand at the 10-year BTP auction was the highest since last May. Unfortunately for those awarded an allocation, yields today are a whole lot higher. To say the least.

That was putting an inexplicable amount of faith that the finance minister had his two deputy premiers well under control. On very little evidence. Other than a wishful assumption that the even hard-line populists always bow to market-friendly necessities. We really have lost our way.

Incidentally, Italian bank stocks have just been halted. And the MIB was down at one point the best part of 4%. One of the EUR/CHF advocates is writing about risks to the supply of capital should there be a downgrade to junk. Sometimes, traders need to be the adults in the room.

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Aregntina Hikes Rates To 65% As Peso Plunges To New Record Low

It appears the market is willing to test BCRA’s mettle as it pukes pesos down to a new record low against the greenback and pushes towards the bottom of its new “no intervention” band.

The new record low is now 41.54/USD…

While not ‘allowed’ to intervene directly until 44/USD, Bloomberg reports that Argentina just hiked its Leliq rate to 65%.

The sharp drop follows Thursday’s 2.8% decline and comes despite the IMF agreeing on Wednesday to increase its bailout package to the Latin American country by an extra $7.1bn.

Paging Christine Lagarde…

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Google Admits Existence Of Censored Chinese Search Engine Project; Dodges Questions At Senate Hearing

Via PlanetFreeWill.com,

Within a Senate privacy hearing on Wednesday – which was seemingly swept out of the media spotlight by the lead up to today’s Judiciary Committee’s hearing involving a Brett Kavanaugh accuser – Google’s chief privacy officer Keith Enright admitted the existence of Project Dragonfly, reportedly a censored search engine for China.

During the hearing, members of the Senate Commerce Committee pressed Enright on how Google’s policies protecting user data would square up with the till-then rumored sanctioned search engine for China.

Before Wednesday’s hearing, Google had refused to confirm or comment on the reports claiming it has begun working on a project called “Dragonfly,” but the Google chief told lawmakers on Wednesday that “there is a Project Dragonfly.”

Enright would maintain while being pressed on the censorship project by Senator Ted Cruz:

“I will say that my understanding is that we are not, in fact, close to launching a search product in China, and whether we would or could at some point in the future remains unclear…

If we were, in fact, to finalize a plan to launch a search product in China, my team would be actively engaged.”

After admitting that “Dragonfly” project did exist, the privacy officer offered dodgy answering, saying that he is “not clear on the contours of what is in scope or out of the scope of that project.”

Senator Cruz then asked if he thought that the Chinese government censors what its citizens see, to which Enright responded:

“As the privacy representative of Google, I’m not sure that I have an informed opinion on that question.”

Project “Dragon Fly” was previously reported as the code name for a censored search app in secret development by Google that would be specifically for China and would blacklist any material deemed unfit by the communist regime.

The project first came to light through a report in The Intercept on September 21 that detailed how Google “forced employees to delete a confidential memo circulating inside the company that revealed explosive details about a plan to launch a censored search engine in China.”

The memo, authored by a Google engineer who was asked to work on the project, disclosed that the search system, codenamed Dragonfly, would require users to log in to perform searches, track their location — and share the resulting history with a Chinese partner who would have “unilateral access” to the data.

The memo was shared earlier this month among a group of Google employees who have been organizing internal protests over the censored search system, which has been designed to remove content that China’s authoritarian Communist Party regime views as sensitive, such as information about democracy, human rights, and peaceful protest.

According to three sources familiar with the incident, Google leadership discovered the memo and were furious that secret details about the China censorship were being passed between employees who were not supposed to have any knowledge about it. Subsequently, Google human resources personnel emailed employees who were believed to have accessed or saved copies of the memo and ordered them to immediately delete it from their computers. Emails demanding deletion of the memo contained “pixel trackers” that notified human resource managers when their messages had been read, recipients determined. The Intercept

Enright’s remarks on Wednesday echoes those of other Google executives in August that claimed the company was “not close to launching” a search product in China. At that time company heads were admittedly considering how to do business again in the Chinese local market. Chief executive Sundar Pichai said that plans to re-enter China with a search engine were “exploratory” and in the “early stages.”

Google left China in 2010 after clashing with Beijing over censorship of search results and a cyber attack on users of its Gmail email service.

Shortly after project “Dragonfly” became familiar to the public, senior research scientist for Google, Jack Poulson, resigned in protest over the companies work on the censored search product.

Paulson told The Intercept‘s Ryan Gallagher that he felt an “ethical responsibility to resign” over the “forfeiture of our public human rights commitments.”

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UMich Confidence Bounces Led By Low-Income Optimism At 18 Year Highs

The final prints for UMich September data was slightly weaker than the preliminary prints but hope and current conditions did bounce MoM and did the headline.

Consumer sentiment remained at very favorable levels in September, with the Index topping 100.0 for only the third time since January 2004.

Most of the September gain was among households with incomes in the bottom third, whose index value of 96.3 was the highest since November 2000. In contrast, the Sentiment Index among households with incomes in the top third lost a total of 8.1% during the past seven months since reaching its cyclical peak of 111.9 in February 2018

In addition, consumers were slightly more likely to favor advance buying ahead of anticipated increases in interest rates and prices—favored by 20% for durables, 13% for vehicles, and 25% for homes.

Finally, we note that the year-ahead expected inflation rate was 2.7% in September, down from 3.0% in August and equal to last September’s figure (which was an accurate year-ahead forecast of the most recent change in the CPI). Long term inflation expectations fell to 2.5% in September from 2.6% in August and equal to last September’s figure.

 

 

 

 

 

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Republican Senators to Plough Ahead With Kavanaugh Vote: Reason Roundup

Republican senators say a judiciary committee vote on Brett Kavanaugh’s confirmation will go forward Friday morning. This comes after a full day of Thursday hearings about Christine Blasey Ford’s accusation that Kavanaugh and his friend Mark Judge attempted to sexually assault her in high school. In the wake of those hearings, Americans and their political mouthpieces are hardly showing any more solidarity on the matter.

Predictably, most prominent Republicans came away after watching the testimony with a professed unwavering faith in Kavanaugh’s innocence and his suitability for a spot on the U.S. Supreme Court. But—in a politically sound but preposterous twist—Republican leadership and spokespeople are also professing to believe Ford’s story about her assault, with one caveat: She must be misremembering the person(s) who did it.

By this morning, White House spokeswoman Kellyanne Conway was spouting this mistaken-identity mumbo-jumbo on CBS This Morning. The editors of National Review repeated some variation on it.

It’s Kavanaugh’s own testimony that probably did him the most damage. Alternately shouting, snarky, and crying, Kavanaugh frequently resorted to sounding off his high-school résumé when confronted with uncomfortable questions. Interestingly, the questions that appeared to make Kavanaugh most uncomfortable weren’t about Ford or the alleged assault but his high-school friend (and alleged partner in sex crimes) Mark Judge, his high-school yearbook captions, and whether he consumed alcohol as a student at Georgetown Preparatory School and Yale University.

Even for folks who claim that Ford is a Democratic operative or that Kavanaugh’s underage conduct is irrelevant to his current character, this poses a problem: Kavanaugh’s current character seems to be that of someone who’s lying about a lot of (often petty) things.

And then there was Kavanaugh accusing the Clintons—whose own sexual misconduct issues he helped litigate in the 1990s—of being linked to a conspiracy against him:

This whole two-week effort has been a calculated and orchestrated political hit, fueled with apparent pent-up anger about President Trump and the 2016 election, fear that has been unfairly stoked about my judicial record, revenge on behalf of the Clintons and millions of dollars in money from outside left-wing opposition groups.

Kavanaugh has “all but abandoned the posture of impartiality demanded of a judge,” suggests Jonathan Chait at New York, who writes that yesterday’s hearings convinced him Kavanaugh is guilty.

“The ‘Well, they both seemed credible’ line requires a frankly heroic willing suspension of disbelief given Kavanaugh’s frequent and rather brazen dissembling,” tweeted Julian Sanchez of the Cato Institute. “If you thought he was credible, you have to be trying to convince yourself.”

“The process itself was disgusting,” comments Glenn Greenwald on Twitter. “Feinstein deserves all kinds of blame. Democrats’ real motive was obviously delay past the election (just like GOP did with Garland). Due process matters. All that’s true. But Kavanaugh clearly (& repeatedly) lied & Ford did not. That matters.”

Now, senators grilling Supreme Court nominees about the definition of “devil’s triangle” and “boofing,” whether they ever whipped out their genitals during a dorm party, and the true meaning of “Beach Week Ralph Club”…let’s just say it’s not among America’s proudest moments.

Yet Kavanaugh’s demeanor during these lines of questioning—even if understandable should he really be innocent—was highly off-putting to a lot of nonpartisan or even supportive people. His alternately boastful and simpering rage might be how a lot of us would react. But perhaps from a legal decision maker on the highest court in the land, it’s not too much to want and ask for better.

In any event, some former backers of Kavanaugh did change their tunes following the testimonies. The American Bar Association said Kavanaugh should not be confirmed until an FBI investigation is completed. And from the Jesuit magazine America:

Evaluating the credibility of these competing accounts is a question about which people of good will can and do disagree. The editors of this review have no special insight into who is telling the truth. If Dr. Blasey’s allegation is true, the assault and Judge Kavanaugh’s denial of it mean that he should not be seated on the U.S. Supreme Court. But even if the credibility of the allegation has not been established beyond a reasonable doubt and even if further investigation is warranted to determine its validity or clear Judge Kavanaugh’s name, we recognize that this nomination is no longer in the best interests of the country. While we previously endorsed the nomination of Judge Kavanaugh on the basis of his legal credentials and his reputation as a committed textualist, it is now clear that the nomination should be withdrawn.

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Europe Launches War On Italy’s Fiscal Plans: Warns Of Debt “Explosion”, Threatens Savers

In the aftermath of Italy’s defiant announcement that it would expand its 2019 budget deficit to 2.4% of GDP, above both the initial proposal from finmin Tria which was 1.6%, and also higher than the European “redline” of 2.0%, the question was how would Europe respond to this open mutiny by Italy.

The answers started to emerge on Friday, when European Parliament head Antonio Tajani said that fiscal targets set by Italy’s eurosceptic government were “against the people” and could hit savers without creating jobs.

“I am very concerned for what is happening in Italy,” said Tajani, who is a center-right opposition politician in Italy and close ally to former Prime Minister Silvio Berlusconi. The budgetary plans “will not raise employment but will cause trouble to the savings of the Italians,” Tajani said.

“This budget is not for the people, it is against the people,” Tajani said, adding that the planned measures “will create many problems in the north (of Italy) without solving problems in the south,” which is the least developed part of the country.

Separately, Pierre Moscovici, EU Economic Affairs Commissioner, said in an interview with BFM television that “Italy, which has debt at 132 percent, chooses expansion and stimulus. It’s “a budget that looks like jaywalking, and out of line with our rules.” 

As a reminder, Italy has the most public debt of any European country, surpassing both France and Germany, and its debt/GDP is the second highest in the EU after bailed-out Greece; until recently, Italy had committed for next year to a deficit three times smaller.

The verbal fireworks continued, with Moscovici reminding Italy that the only reason its “explosive” debt hasn’t collapsed is due to the ECB’s purchases, which has been actively monetizing it for the past few years.

“We have no interest in a crisis between the Commission and Italy,” Moscovici said. “But it’s also not in our interest for Italy to not respect the rules and not reduce its public debt, which remains explosive.”

In turn, Italy’s Di Maio swiftly brushed away Moscovici, with Bloomberg quoting him as telling reporters at a Rome event that “the concerns are legitimate but the government has committed itself to maintaining the deficit-GDP at 2.4 percent and we want to repay the debt.” Salvini was similarly confident. “Markets will come to terms with the budget,” he said in a Facebook video.

The verbal spat took place amid a broad-based liquidation of Italian assets which saw 10Y Italian yields rise as much as 35 basis points to 3.24%, the biggest increase since a rout in May during the government’s formation. The yield spread over Germany reached a three-week high.

Christoph Rieger, Commerzbank’s head of fixed-rate strategy chimed in, saying that investors are right to be nervous with the budget compromise at the high end of the range that had been talked about before.

“And what weighs more, it has demolished Tria’s credibility,” Rieger said. “This underlines the balance of power within the government, and having a lame duck finance minister in this situation will require a higher risk premium.”

For now, the European response to Italy’s defiance has been confined to verbal escalation. As Bloomberg notes, Italy has to submit its 2019 budget for approval to the Commission by Oct. 15, at which point Brussels has the power to impose fines of up to 0.2% of GDP on countries that persistently break the bloc’s fiscal rules. What would complicate a crackdown on Italy is that when “push came to shove” in 2016, the Commission opted to not penalize Spain and Portugal – the culprits at the time – and instead imposed symbolic zero sanctions.

The decision was seen at the time as an effort by the EU’s executive arm to not alienate its members amid rising populism and discontent with austerity. But for many EU officials, it tarnished the credibility of the bloc’s fiscal rules.

As such, any sanctioning of Italy will be seen as a personal vendetta against the Mediterranean country.

Additionally, the loosened budget target is seen as a setback for finance minister Tria and President Mattarella, who had “sought to moderate the more extreme instincts of the government” formed in June by Di Maio’s anti-establishment Five Star Movement and Salvini’s anti-migrant League according to Bloomberg. On the other hand, it shouldn’t be surprising that a country which has demanded populist policies ends up with just that.

As for the technocratic Tria, who initially brought a sense of calm among investors due to his moderate approach, and whose budget recommendations were trampled, he said said he’ll stay in his job because he has a responsibility to help maintain stability, La Repubblica newspaper reported. One look at the turmoil in Italian markets this morning would suggest that he has failed at that job as well…

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