MILAN—Italian police early on Tuesday arrested Finmeccanica SpA FNC.MI -7.31%Chief Executive Giuseppe Orsi as part of an investigation into possible international corruption related to the 2010 sale of helicopters by the Italian aerospace company to India, according to the prosecutor in the investigation. Hours after the arrest, India's Defense Secretary Shashikant Sharma told The Wall Street Journal that the country's government had ordered its federal investigation agency to investigate the helicopter deal. The official gave no further details of the Indian investigation. Mr. Orsi has been under investigation for several months in the case, in which Italian prosecutors are looking into whether the helicopter unit of Finmeccanica paid bribes to secure the €560 million ($750 million) sale of 12 helicopters to the Indian government, according to Finmeccanica and a person close to the investigation. Mr. Orsi was chief executive of AgustaWestland, the helicopter unit, at the time. Eugenio Fusco, the prosecutor on the case, also said that Bruno Spagnolini, current head of AgustaWestland, had been placed under house arrest as part of the same probe. Mr. Spagnolini was chief operating officer of AgustaWestland in 2010. A lawyer for Mr. Orsi, who hasn't been charged in the case, wasn't immediately reachable for comment. Mr. Orsi has in the past denied any wrongdoing. In a statement, Finmeccanica expressed support for Mr. Orsi and said the company's operations would not be affected by the arrest. A spokesman for AgustaWestland had no comment, and a lawyer for Mr. Spagnolini—who hasn't been charged—wasn't reachable for comment. The arrest of Mr. Orsi—who runs a company that is majority-owned by the Italian state—comes at a politically sensitive moment, just two weeks ahead of national elections. Outgoing Prime Minister Mario Monti said the government would deal with management issues created by the arrest. "(This opens up) a problem of governance at Finmeccanica, which we will address," he said in a radio interview on Tuesday morning. Mr. Orsi has said that he would step down from his position if the Italian government, which owns 30.2% of Finmeccanica, asked him to. Finmeccanica's stock fell 8.06% to €4.37—its lowest in two months—after being suspended from trade on the opening of the Milan exchange.

The Italian caretaker Prime Minister, Mario Monti, has promised to cut labour taxes in an interview seen as the launch of his election campaign. Mr Monti, who leads a centrist coalition while not standing as a candidate himself, also attacked conservative rival Silvio Berlusconi. In office he vowed to restore market confidence in Italy's finances. Wednesday saw him achieve his aim of halving the difference between Italy's and Germany's bond yields.

These indicate a country's cost of borrowing and reflect how nervous investors feel about lending to them. Germany is used as a benchmark as it is considered the safest bet in the eurozone.

The difference between Italy and Germany's yields dipped below 2.87 percentage points on Wednesday.

When Mr Monti took office as head of a technocratic government in November 2011, the spread had stood at 5.74 percentage points.

Mr Monti's centrist allies are in a three-way race with Mr Berlusconi's People of Freedom party on the right and the Democratic Party on the left. Speaking on radio, Mr Monti pledged to take measures to redistribute wealth in the country.  "We need to reduce taxes on the labour force, both on workers and companies, by cutting spending," he said. He defended his administration's record, saying that the "light at the end of the tunnel" was "much nearer".

Since withdrawing his party's support for the government in December, Mr Berlusconi has repeatedly launched attacks against the former European commissioner. "Berlusconi has made improper attacks against me - on areas like family values," Mr Monti said on Wednesday.

"I think I need make no further comment," he added, in an apparent reference to the string of sex scandals involving the veteran billionaire politician.  Mr Monti, a former economics professor, was chosen to impose financial rigour on the economy, after Mr Berlusconi quit the prime minister's job.  In power, Mr Monti made some progress early on, including raising the retirement age and structural reforms. However ordinary Italians have been hard hit by the combination of tax rises and spending cuts he imposed to repair Italy's public finances. Italians are due to go to the polls over the weekend of 24-25 February....
The Euro will survive even if the ECB has to kill Europeans and recycle them into Euro notes, bit like Soylent Green only bank notes instead of food. Interesting fact on the EU today, they have ordered all the cash machines in the Vatican City to be turned off because the Vatican has failed to comply with anti money laundering regulations. Is this the shape of things to come.

Italian centre-left Democratic Party chief Pier Luigi Bersani is set for a run-off vote next week against young pretender Matteo Renzi, after millions of supporters chose their nominee for next year's general election.With 40 percent of the votes counted from Sunday's balloting,  Bersani was in front with 44.3 percent support, followed by Florence mayor Renzi with 36.3 percent, the organising committee said. More than four million supporters took part in the vote which will now head for a second round run-off on Sunday. A general election is expected in April 2013 with the winner of the centre-left nomination one of the favourites to replace Mario Monti as Italy's next prime minister. All the most recent polls show the Democratic Party coming first in the general election. Observers were surprised by the large turnout for the primaries and many polling stations were overwhelmed, with large queues forming outside. More and more Italians are feeling the pain of a recession that began in the second half of last year and is forecast to continue into next year. The main drama is between 61-year-old Bersani, a cigar-chomping former communist with a liberal economic orientation, and rising star Renzi, who at just 37 is a new face in politics, inspired by US President Barack Obama. The primary is being held at a time of deep economic crisis and political uncertainty in Italy, with a series of corruption scandals within the main parties sparking voter apathy and disgust with traditional leaders. Both men have said they will follow the broad course of reforms set by unelected technocrat prime minister Monti, but will seek to curb some of the more unpopular austerity measures he has advocated and do more to boost growth. "We have to show the rest of the world that we don't just have Monti," Bersani, a former economic development minister, said last week. "People want to take part, they want to have a politics that is in touch with the streets, with the squares, that returns hope to the country," he said.   Monti, a former European commissioner, took over from Silvio Berlusconi a year ago as Italy struggled with the eurozone crisis. While his cuts have angered many, he is seen as having saved Italy from a Greek-style collapse.

Venice floods

Hundreds evacuated in Tuscany as Venice floods --- Some 200 people were evacuated in parts of Tuscany as heavy rains over the weekend left 70 percent of the city of Venice underwater, authorities said on Sunday. Sea levels peaked at 1.5 metres above normal levels before receding slightly.     

 Floodwaters drenched most of the tourist destination of Venice and led to the evacuation of 200 people in Tuscany, as bad weather hit northern Italy at the weekend, authorities said Sunday.  In Venice itself, heavy rains and winds from the south triggered "acqua alta" (high water) and 70 percent of the city was flooded, with sea levels reaching a peak of 1.5 metres (five feet) above normal before receding slightly, they said.  In Tuscany, around 200 people were evacuated because of heavy rains which flooded homes and caused mudslides, local officials said.  The most affected region was the province of Massa and Carrara, which produces the famous Carrara marble.  In Massa di Carrara alone, some 50 people were evacuated and a car was carried away by an overflowing river, but the couple in the vehicle were saved by firefighters.  The authorities have urged the local population to avoid going into the streets and to stay in the the upper floors of their homes.  In Pisa, some streets have been without electricity following the floods. In the large Tuscan port of Livorno, civil defence forces were on alert because of the heavy rains. In Liguria, the region bordering Tuscany, 30 people had to be evacuated, the authorities said. In anticipation of the floods two days ago, the authorities issued warnings and planned security measures to avoid any casualties after 13 people died in Tuscany and Liguria a year ago.  The bad weather was heading slowly towards the centre of the country and was set to hit Rome where civil defence forces have been put on alert.

Responding to the riots that followed last week's proposal as well as dissent from within his own Socialist party, Prime Minister George Papandreou said: "The command of the Greek people will bind us. Do they want to adopt the new deal, or reject it? If the Greek people do not want it, it will not be adopted." Staging a referendum threatens to throw the euro zone further into crisis as the majority of Greeks object to the bail-out, according to a survey published last week. If Greece were to reject the plan, which requires deep spending cuts, it would risk a full-scale default and possible ejection from the euro. The country could even run out of money to pay civil servants or state pensions if the troika decided to pull the plug. European leaders and the IMF have struck a deal that would see banks take a 50pc write down on Greek loans, cutting the country's debt by up to €100bn, alongside a €130bn international rescue effort on top of the existing €110bn package. No dates have been set for the referendum, which would include a confidence vote in the government. Yields on 10-year bonds jumped to 6.18pc on Monday, while spreads over German Bonds reached 410 basis points, nearing the critical level where LCH Clearnet raises margin requirements. This, in turn, triggers further selling. However, The Greek Constitution permits referenda EXCEPT for questions involving potential revenue measures including taxation. On that basis any referendum in Greece on the aid package and accompanying revenue measures is unconstitutional.

Mario Draghi has little latitude for monetary stimulus. Germany has imposed a de facto veto on large-scale purchases of Italian and Spanish bonds, viewed by orthodox monetarists as a slippery slope towards debt monetization. Intesa Sanpaolo Giovanni Bazoli said the spreads are un stainable "not just in the medium run, but in the short run as well". He warned of a credit crunch in Italy as banks struggle to meet higher capital ratios set by EU leaders. The renewed jitters came as the OECD club of rich states slashed its euro zone growth forecast for next year from 2pc to just 0.3pc, implying an outright recession over the winter. The body called on the ECB to cut interest rates and deploy its full lending power to head off debt contagion to Italy and Spain. The OECD said the world risks a fresh crisis of equal magnitude to the Great Recession if authorities fail to act in time, with GDP contractions of up to 5pc in some big economies by early 2013. The ECB's new president The Bundestag voted last week to upgrade the EU's bail-out fund (EFSF) to around €1.2 trillion but only on condition that the ECB steps back from its support role. This pits Germany against much of the world. The US Treasury, the International Monetary Fund, and most leading economists fear the fund will fail without a central bank prop.

Not Germany, Austria, or Switzerland is Italy

This is not Germany, Austria, or Switzerland is Italy - It is Italy – a nation not known for its work ethic or admiration of rules and regulations, and one which, last week, seemed to be teetering on the brink of financial and political meltdown. "The rest of Italy definitely envies us," said Mr Durnwalder, who is president of the semi-autonomous South Tyrol region. The area, with its bilingual German and Italian population, sits on the geographic, political and cultural fault line of the eurozone. It has almost no unemployment, its inhabitants are among the richest in the country, and in stark contrast to city halls elsewhere in Italy, the local administration has no debt. "The rest of Italy envies the results," he adds with a chuckle. "But not the work." Italy, the euro zone's third largest economy, is again at the centre of the debt crisis, as fears grow that its borrowing costs could hit levels that overwhelm the capacity of the bloc to provide support amid chronic political instability in Rome. The situation was described as "confused and dramatic" last week by Mario Draghi, the new head of the European Central Bank - who himself is an Italian. Italy has the second highest public debt in the eurozone after Greece – the equivalent of 120 per cent of GDP – and is suffering from chronically stagnant growth. The three main credit agencies have all downgraded Italy recently, meaning that its economy is judged to be less secure than those of Slovakia and Estonia – the two poorest eurozone countries. South Tyrol, by contrast, an area of 3,000 square miles and 500,000 inhabitants that retains strong control over its own finances, retains Triple A Star credit rating. Average GDP per head in the area around Bolzano was €34,600 - more than double that of Sicily, which has a similar degree of autonomy - and South Tyrol's unemployment is barely two per cent. In Sicily it is around 25 per cent, and the regional economy is blighted by corruption, low productivity and poor administration. The rest of Italy, says Mr Durnwalder, must now likewise learn to live within their means, as they do in the Alpine valleys he calls home.

NOTES about EFSF - I've read before that the EFSF is permitted to issue bonds denominated in currencies other than the euro, but the governments of the euro zone states have promised to provide guarantees denominated in euros, and I doubt that all 17 national parliaments have passed laws authorizing their governments to provide guarantees denominated in any other currency and laying down conditions for them to do that, especially regarding the applicable exchange rate“We have so far only issued euro bonds but we are authorised to use any currency we want if it seems efficient,” Klaus Regling, chief executive of the European Financial Stability Facility (EFSF), said. "It also depends on the Chinese authorities, whether they would approve that. I think it is probably more difficult. But I could imagine that over the years it might happen," he added. China has the largest foreign exchange reserves in the world, valued at $3.2 trillion (£2 trillion) . Mr Regling also said that investors may be protected against a fifth of any initial losses. “The EFSF will take a certain tranche that will be a junior tranche, which means if something goes wrong, the first loss will be carried by the EFSF. It could be around 20pc,” Mr Regling said in a speech at Tsinghua University.

"To fulfill its mission, EFSF issues bonds or other debt instruments on the capital markets. EFSF is backed by guarantee commitments from the euro area Member States for a total of €780 billion and has a lending capacity of €440 billion."

Therefore if I was the responsible person in the Chinese government, or indeed any other investor who might be interested, I would be looking ahead to how the yuan-euro exchange rate might change during the lifetime of the bonds denominated in Yuan. To the extent that I anticipated that the yuan would strengthen against the euro, I would also anticipate an effective weakening of the euro denominated guarantees of yuan denominated bonds. To take a simple illustration, if I anticipated that the value of the yuan would double against that of the euro then I would calculate that if the EFSF only issued bonds denominated in yuan then the effective value of the €780 billion total guarantees would be halved, meaning that its effective borrowing and lending capacity would be halved from €440 billion to €220 billion. And if the EFSF is expected to provide guarantees to assist a second SPV or SPIV to borrow much larger sums, anything which erodes the effective value of the guarantees provided to the EFSF by the eurozone state governments must also erode its capacity to provide guarantees to that larger SPIV.

Welcome back to my live blog, which will be covering the euro-zone leaders’ crucial meeting today where they will attempt to reach a definitive agreement to tackle the bloc’s spiraling debt crisis and market movements. There are worries that a deal will not be agreed, despite the urgency of the situation. The euro-zone leaders need to reach a deal on a second Greek bailout, including agreement on how much Greek bondholders will have to write off in so-called haircuts. They also need to confirm final details of a deal to boost the euro zone’s rescue fund–the European Financial Stability Facility. Meanwhile, the EFSF needs to be ratified today by the German parliament and Italian policy makers wrestle to come up with a solution to its debt mountain which satisfies both the EU and, perhaps more importantly, the markets.

The Italian Treasury paid higher yields Wednesday than a month ago to sell the planned €10.5 billion short-term debt, as markets remain tense over Italian political and economic prospects, and over the outcome of the European Union summit later in the day. The Treasury, which faces a further two debt sales this week, sold €8.5 billion in six-month Treasury bills and €2 billion of the September 2013-dated CTZ, a zero-coupon bond. It paid an average yield of 3.535% on the six-month T-bills, up from 3.071% previously. It paid a yield of 4.628%, up from 4.511%, on the CTZ. Demand was in line with previous auctions.
"The rising yields reflect increasing political uncertainty in Italy," said Tobias Blattner, director for economic research at Daiwa Capital Markets. "They also reflect uncertainty over tonight's summit, as hopes for a solution to the debt crisis seem now fading." Italy is at the forefront of euro-zone concerns with €1.9 trillion in debt, said Société Générale analysts. The country is facing simultaneous headwinds, including a cyclical slowdown which, in SocGen's view, will "almost certainly" lead to a recession in 2012 and 2013 and a structural loss of competitiveness, as well as an electoral system that prevents a clear-cut improvement in establishing economic policy.

New Challenge Could Be Launched at Highest Court

GERMANY - A new panel of lawmakers set up by the German parliament to reach quick decisions on the release of rescue funds from the European Financial Stability Facility (EFSF) may be in breach of the German constitution, a study by the parliament's research unit has shown. The panel is intended to ensure that parliament has a say in the release of funds from the EFSF, following a Constitutional Court ruling last month which said the parliament must be involved in measures to bail out other euro-zone member states. The nine-member body, to be selected from the parliament's budget committee, is to approve bailout decisions with the necessary speed and confidentiality to avoid fanning financial market turmoil. New Challenge Could Be Launched at Highest Court - But the study, undertaken by legal experts and commissioned by a member of parliament from the opposition center-left Social Democrats, Swen Schulz, has cast doubt on whether the panel will preserve an adequate degree of parliamentary sovereignty on budget decisions amounting to billions of euros. "Delegating this authority to a special body shifts responsibility onto a small number of people and obstructs the involvement of all members of parliament in the parliamentary process," the study says. Schulz is now considering taking the matter to the Constitutional Court, which is Germany's highest judicial authority. "A nine-member panel can't replace the Bundestag in such an important question," he says. Last month, the court rejected lawsuits filed by eurosceptics aimed at blocking the participation of Europe's biggest economy in bailout packages for Greece and other euro-zone countries. But it said the government must seek the approval of parliament's budget committee before granting aid.

Lot's of "smoke" again ...

Jose Manuel Barroso has said he will this week propose “individual criminal responsibility for financial players to be recognised in European law”. The plans for an EU-wide directive would focus on curbing high frequency trading. “We have seen abusive behaviour, and some of this caused the current crisis. We are going to clamp down on these practices,” Mr Barroso told Le Parisien. “Those who violate the rules will face criminal penalties. This will be a first in European legislation and a strong signal.” The Commission will invoke new powers under Article 83 of the Lisbon Treaty allowing the EU to impose minimum rules and sanctions on member states when needed “to ensure the effective implementation” of EU policies. The clause allows the EU to broaden the European Arrest Warrant beyond limited areas such as terrorism, drug-trafficking, and money-laundering to softer crimes if they have a “cross-border dimension”. G20 finance ministers praised Europe’s efforts to “maximise the impact” of the EU’s €440bn bail-out fund (EFSF) and ensure that the region’s banks are “adequately capitalised”, but there were heated exchanges behind closed door as the Anglo-Saxon states, and India rebuked Europe’s leaders for failing to grasp the nettle and mobilize the full lending power of the European Central Bank. “They clearly have more work to do on strategy and details,” said US Treasury Secretary Tim Geithner. “In financial crises, it is more risky to act gradually and incrementally than to act with bold force”. Diplomats say Mr Geithner’s plan to use the ECB as a guarantor of eurozone sovereign bonds was dismissed out of hand, while the EU failed to offer clear assurances that bank recapitalisation would be carried out with sufficient speed and scale to halt an incipent run on the system. Olli Rehn, the EU’s economics commissioner, said Brussels will announce a “very serious plan” over come days to beef up banks and strengthen the firewall against contagion. German foreign minister Guido Westerwelle politely told the US to mind its own business. “I cannot understand some of the comments of our American friends. You can’t solve a debt crisis with more debt,” he told Bild Zeitung. Germany's finance minister says private holders of Greek government bonds must accept bigger losses to achieve "a durable and sustainable solution" for Europe's debt crisis. Wolfgang Schaeuble told German public broadcaster ARD on Sunday that an agreement struck in July when banks and other investors agreed to renounce on 20 percent of their Greek debt must be renegotiated. He says the private sector's contribution to a reduction of Greece's debt burden "will probably have to be higher." The Institute of International Finance, a global bank lobbying group, says its managing director Charles Dallara is in talks with officials from the 17-nation eurozone about the July agreement. Spokesman Frank Vogl declined to elaborate, but the group's leadership has so far rejected accepting bigger losses.

Italy is auctioning as much as 7 billion euros ($10 billion) of bonds Tuesday, one day after borrowing costs surged at a bill auction, as Greece’s slide toward default roils global markets. The treasury is selling 4 billion euros of a new benchmark five-year bond, after 10-year yields climbed to a five- week high of 5.571 percent. Investors charged Italy 4.153 percent Monday in a one-year bill offering, up from 2.959 percent a month ago. “It’s rather unfortunate that the Italian auction is taking place when the market is in a panic mode,” said Fabrizio Fiorini, the head of fixed income at Aletti Gestielle SGR SpA in Milan. “Borrowing costs are likely to remain at elevated levels. The rise in Italian yields is manifestation of a lack of market confidence in European leaders’ ability to tackle the problem.” A debt of 1.9 trillion euros -- more than Spain, Greece, Ireland and Portugal combined -- leaves Italy vulnerable to any advance in borrowing costs as it refinances maturing debt. The sales, which also include as much as 3 billion euros of bonds due in 2018 and 2020, will help fund 14.5 billion euros of debt scheduled for repayment on Sept. 15.

Bank of France Governor Christian Noyer said French lenders are capable of facing any Greek response to sovereign-debt difficulties and have no liquidity or solvency problems. “Whatever the Greek scenario, and whatever provisions have to be made, French banks have the means to face it,” Noyer said in an e-mailed statement today. “French banks have neither liquidity nor solvency problems.” BNP Paribas SA, Societe Generale SA and Credit Agricole SA plunged today in Paris on a possible ratings cut by Moody’s Investors Service, extending their more than 40 percent slide in the last three months. Noyer also said 5 trillion euros ($6.8 trillion) of collateral is available in the euro system and the European Central Bank is providing 500 billion euros of refinancing. French banks have added 50 billion euros to their capital in two years, he said.

As Italy's borrowing costs soared and its stock markets plummeted, last week the ECB's president, Jean-Claude Trichet, and his designated successor, the Italian central bank governor Mario Draghi, wrote to Berlusconi listing the demands he would have to meet if the bank were to intervene and buy Italy's embattled bonds. According to one report, the ECB's demands were set out in humiliating detail. Last Friday, Berlusconi promised a broad range of structural reforms and announced he was bringing forward to 2013 the target date for the elimination of Italy's budget deficit. A new package of measures is due to be endorsed at a cabinet meeting that could be held as early as Friday. Berlusconi's right-wing government has said the package will be enacted by decree, but it would then need to be approved in parliament. Bossi, the leader of the Northern League, called the ECB's letter "an attempt to overthrow the government". In a reference to Draghi that suggested the central banker harboured political ambitions, Bossi said: "I fear that this letter was done in Rome. He's gone from here into Europe, but he's always in Rome." Draghi has been touted as the possible leader of a non-party, or cross-party, cabinet to lead the country were Berlusconi to fall. Bossi also made it clear he was not happy with suggestions that the ECB wanted pension cuts. Berlusconi has refused repeated calls from the opposition and the trade unions for the letter to be made public. But his finance minister, Giulio Tremonti, supplied more detail on the government's plans to a parliamentary committee.