Aug 28 2025

What Happens When Governments Cannot Sell Their Debt?

Posted originally on Aug 28, 2025 by Martin Armstrong |

QUESTION: Marty, you have mentioned that at some point in history, when Italy could not pay off its 30-day short-term paper because it could not sell the new debt to pay off the old, as they do today, they converted 30-day paper to long-term. I cannot find the details on that. Could you please explain this, as it is a risk here in Europe today?

Bret

ANSWER: Yes, that was during the Panic of 1893 that became a Global Contagion. Italy, when faced with similar circumstances to what we see today, did not officially default in the classic sense of failing to pay. Still, it executed a coercive debt restructuring that is widely considered a selective default or soft default in 1893-1894. This is what we refer to as a forced loan.

Italy was facing a run on its short-term debt and unable to roll over the maturing paper because there were no buyers, the Italian government, led by Prime Minister Francesco Crispi, did not formally declare a default. Instead, it passed a law (Legge 11 luglio 1894, n. 386) that forcibly converted the short-term Buoni del Tesoro into a new long-term bond.

The law mandated that holders of the short-term Treasury notes could not be repaid in cash upon maturity. Instead, they were forced to exchange their maturing short-term paper for a new long-term government bond, called the “Rendita Italiana 5%” (5% Italian Annuity).

This new bond had a 5% coupon but was issued at a price below par (effectively giving a higher yield to compensate, somewhat, for the forced nature of the deal). Crucially, it was a perpetual bond, meaning it had no final maturity date.

The Italian government unilaterally changed the terms of its debt. Investors lent money for 30 days, expecting to be repaid in cash at the end of that term. The government broke that promise.

Investors had no choice. They could not get their cash back; their only option was to accept the new long-term instrument. While they received a new security, it was illiquid (perpetual) and its value was uncertain. This action caused significant financial losses for many Italian banks and citizens who held the paper.

I would expect that Europe will pull this one off when it can no longer issue new debt to pay off its old debt. We are living in a perpetual Ponzi scheme. There is ONLY one way this ends, and that is a default or a forced loan.

Aug 26 2025

German Chancellor Merz Says Entitlement Programs No Longer Sustainable

Posted originally on CTH on August 25, 2025 | Sundance

CTH noted several months ago, end the Marshall Plan for Europe and things will change quickly.

Germany is in a tight economic place as a result of: (1) former leftist Chancellor Olaf Scholz alignment with climate change policy, radically changing the German energy base and driving up costs; (2) the financial support for Ukraine; (3) the financial burden of mass African/ME migration, and (4) the new Trump-era EU tariffs that effectively end the Marshall Plan.

Put all four elements together and the German economic contraction is only forecast to worsen. This is the reality that current German Chanceller Fredrich Merz is facing. Thus, as a non-pretending former businessman, Merz recently told his party and the German electorate that current financial conditions no longer support the expansive entitlement state.

Pensions, benefits and even healthcare are potentially going to be impacted. Germans are not happy.

GERMANY – The German welfare state is no longer financially sustainable, Friedrich Merz said on Saturday. The chancellor argued for a fundamental reassessment of the benefits system as spending continues to soar past last year’s record of €47bn (£40bn).

In a state-level party conference meeting on Saturday, Mr Merz said: “The welfare state as we have it today can no longer be financed with what we can economically afford.”

Once the export champion of Europe, Germany’s economy has slowed dramatically since 2017, with GDP growing by only 1.6 per cent since then versus 9.5 per cent for the rest of the eurozone.

Germany’s economy shrank by 0.2 per cent last year following a 0.3 per cent dip in 2023 – the first time since the early 2000s the economy has retreated two years in a row.

Industrial production fell under the Left-leaning “traffic light” coalition of Olaf Scholz and continues to slide under the new government, with GDP declining by 0.3 per cent in the second quarter of 2025.

Meanwhile, spending on social welfare has exploded, and is set to increase further this year as Germany’s population ages and unemployment rises. Although the majority of benefit recipients are German, large numbers are non-German citizens.

[…] Germany has in place a so-called “debt brake”, which limits how much the government can borrow to fund its spending plans.

Mr Merz’s views on the welfare state are likely to provoke discontent among his Social Democratic Party (SDP) coalition partners, whom he relies on for a thin majority in the Bundestag.

[…] Lars Klingbeil, the SPD leader and vice-chancellor, hit back at Mr Merz’s announcement with calls for increased taxation on top earners. He called for a summit focused on helping industry leaders respond or adapt to US tariffs and said “no option is off the table” when it comes to plugging the 30-billion-euro gap in Germany’s budget. (more)

A note of caution. Historically speaking, when the German economy gets bad enough, Europe ends up in a war.