Italian post-election polls are indicating that Italy will have a hung parliament. Reports have former Italian Premier Silvio Berlusconi gaining ground, while earlier readings had Pier Luigi Bersani’s center-left coalition in the lead. The problem is that Italy has to stick to its already-enacted and planned austerity measures and a hung parliament that could sway either way after the results are known could jeopardize that.

Investors and the public probably know it by now, but the real issues is that Italy is too damned big to bail out. We featured this and the statistics behind this on Friday ahead of the elections. There just isn’t enough money to throw into Italy to bail it out. We knew most Americans would not care because they had things the weekend and the Academy Awards to worry about after a long week. Italy matters all over again. Here is how things look in New York ADR and ETF trading:

• iShares MSCI Italy Capped Index (NYSEMKT: EWI) is down 4.8% at $12.32
• Eni SpA (NYSE: E) fell by over 3% to $44.91
• Luxottica Group SpA (NYSE: LUX) is down by 2% at $44.76
• Telecom Italia S.p.A. (NYSE: TI) is down 3.2% at $7.55

Elsewhere in the PIIGS:

Greece – National Bank of Greece SA (NYSE: NBG) is down 5.9% at $1.27; Global X FTSE Greece 20 ETF (NYSEMKT: GREK) is down 6.7% at $17.80.

Portugal – Portugal Telecom, SGPS S.A. (NYSE: PT) is down 2.7% at $5.12.

Spain – Telefonica (NYSE: TEF) is down 1.9% at $12.57; iShares MSCI Spain Capped Index (NYSEMKT: EWP) is down 4% at $29.20; Banco Santander, S.A. (NYSE: SAN) is down 4.6% at $7.41; Banco Bilbao Vizcaya Argentaria, S.A. (NYSE: BBVA) is down 6% at $9.50.

Ireland – The Bank of Ireland (NYSE: IRE) is down 1.3% at $8.06; iShares MSCI Ireland Capped Investable Market Index (NYSEMKT: EIRL) is down 2% at $26.31; and The New Ireland Fund, Inc. (NYSE: IRL) is down 1.5% at $9.82.

The trend these days is to vote against austerity measures. That even applies to a promise to end certain austerity measures that have already started. Maybe Italy will catch on and do what is so popular to do now: look up at the wealthy and try to make them pay more.

Italy matters again and it is very possible that if things start to get tangled up in Italy based upon this election that the spillover is going to lead to a domino-effect where other PIIGS and troubled European nations lose the stability that had been forming in the last 3 or 4 months.

All in all that is just not as bad as things could have been and the report showed that 7 banks needed no capital at all. The Bank of Spain said, “Seven banking groups, accounting for more than 62% of the analysed portion of the Spanish banking system’s credit portfolio, do not have additional capital needs.”

Of the 59.3 billion needed for the other banks, this actual amount falls to 53.75 billion euros when the mergers under way and the tax effects are considered.

It is interesting that Banco Santander, S.A. (NYSE: SAN) and Banco Bilbao Vizcaya Argentaria, S.A. (NYSE: BBVA) are both still down as far as the ADRs in New York trading.  The adverse scenario is on that 53.7 billion euro basis after tax but the baseline scenario comes to almost 26 million euros.

Unfortunately, this is after the close of the European markets and it is a topic very long in the tooth on a Friday afternoon. The iShares MSCI Spain Index (NYSE: EWP) is still down 2.9% at $27.72 today.

FULL BANK OF SPAIN REPORT

JON C. OGG

You can imagine what the protests are about: austerity measures, lower pay, longer work, and an impending decision on whether or not the nation will formally ask for an EU/ECB bailout. The problem is not just Spain, but its provinces as some are already planning to seek formal emergency aid from Spain’s central government.

A report here from the BBC has more detail and another report from Sky News showing more about the riot police being called out and more..

The iShares MSCI Spain Index (NYSEMKT: EWP) is key to watch in this issue. We would note that the three local shares, which trade as ADRs in New York, of Banco Bilbao Vizcaya Argentaria, S.A. (NYSE: BBVA), Banco Santander, S.A. (NYSE: SAN), and Telefonica SA (NYSE: TEF) make up close to half of this ETF.

A deadline of Thursday has been circulating since last week but we will see how this plays out.

JON C. OGG

Bank of America Merrill Lynch noted this morning as part of its European outlook that Spain’s housing market could go the same way the housing market went in Ireland. That would be further south, by the way. Bank of America is addressing concerns that the Spanish housing market may follow Ireland, but the bank’s take is that the imbalances in Ireland were larger, and it also asserts that the Spanish bank recapitalization caters sufficiently for further price falls.

Banco Santander S.A. (NYSE: SAN) is seeing a 1% drop in its New York ADRs to $6.77, and Banco Bilbao Vizcaya Argentaria S.A. (NYSE: BBVA) is seeing its ADRs down 2% in New York trading at $6.97. The iShares MSCI Spain Index (NYSEMKT: EWP) is down by 0.8% at $25.27 on the day. Even the ADRs for Telefonica (NYSE: TEF) are down 1.3% at $12.55 today.

JON C. OGG

So, what happens when nations try to ban short selling? All we have to do is ask Spain, which today has passed a short selling ban for three months. Spain has now reported a 1% drop in gross domestic products, but it seems fair to ask if that 1% should be “only 1%,” if you just looked at the headlines. Unlike other European short selling bans, where the ban only applied to the troubled banks and financial companies, this ban pertains to ALL public companies.

The iShares MSCI Spain Index (NYSEMKT: EWP) is down 3% at $20.47, against a prior 52-week range of $20.98 to $40.34. The Spanish 10-year yield also is up 25 basis points at 7.43% on last look. Banco Santander, S.A. (NYSE: SAN) hit a new 52-week and multiyear low after a 1.6% drop to $5.03, compared a prior 52-week range of $5.10 to $11.06. Banco Bilbao Vizcaya Argentaria, S.A. (NYSE: BBVA) is down 2.5% at $5.48, and the prior 52-week range was $5.57 to $10.84.

To make matters worse, Greece is reportedly back in the spotlight on reports that the International Monetary Fund likely will halt payments, and that could bring up default risks all over again. Global X FTSE Greece 20 ETF (NYSEMKT: GREK) is down 9.5% at $10.57 and National Bank of Greece SA (NYSE: NBG) is down 8.5% at $1.40.

In Portugal, the ADRs of Portugal Telecom, SGPS S.A. (NYSE: PT) are down 3.3% at $4.13 in New York trading. Even the Irish are suffering with Europe and the PIIGS: Bank of Ireland (NYSE: IRE) is down 2.1% at $5.01.

JON C. OGG

While Angela Merkel has maintained her pledge of no bonds (no direct debt sharing and assumption), today’s news is exceeding what the markets were hoping for yesterday,  Currently the DAX is up 2.6% in Germany, the CAC is up 3.1% in Paris, and even the FTSE in the United Kingdom is up 1.6%.

ADR trading in the banks is up in early New York trading, as you would guess.  Banco Santander, S.A. (NYSE: SAN) is up 5% at $6.46; Banco Bilbao Vizcaya Argentaria, S.A. (NYSE: BBVA) is up 6.1% at $6.87; National Bank of Greece SA (NYSE: NBG) is up a whopping 13% at $1.73; The Bank of Ireland (NYSE: IRE) is up 4.6% at $5.60.

The large developed nation banks are on the mend too. Deutsche Bank AG (NYSE: DB) from Germany is up 6.5% at $36.10.

Swiss banks are on the rise too as this solidifies their counterparties.  Credit Suisse Group (NYSE: CS) is up 4% at $18.13 and UBS AG (NYSE: UBS) is up over 2% at $11.48.

Due to the overhang of the price fixing of LIBOR and the potential criminal implications of that effort, Barclays PLC (NYSE: BCS) is going against the grain and is down yet again by over 1.5% at $10.67.

The ETFs are on the med as well: iShares MSCI Spain Index (NYSEMKT: EWP) is up 4.8% at $24.23; Global X FTSE Greece 20 ETF (NYSEMKT: GREK) has not traded but is indicated higher; iShares MSCI Italy Index (NYSEMKT: EWI) is indicated up 5% at $10.96.

Today’s move allows banks to get aid without sovereign nations taking on the direct obligations on top of their stretched books and adding to their high rates of borrowing.  In some ways, this may be like a TARP program but perhaps without as many strings attached.

The Euro currency was trading at $1.2573 on last look, up from $1.2431 yesterday, and this has the CurrencyShares Euro Trust (NYSEMKT: FXE) is up 1.5% at $125.70 so far this morning.

JON C. OGG

What is interesting is that Spanish equity markets are up.  Maybe the real takeaway is that even if the Spaniards are having to pay up they are still able to borrow.  The criteria of ‘good news’ may be changing again.  The IBEX 35 was up 1.4% at 6,892.80 on last look and that has the indication for the iShares MSCI Spain Index (AMEX: EWP) looking a tad higher today after gains on Wednesday. Banco Bilbao Vizcaya Argentaria, S.A. (NYSE: BBVA) is actually indicated higher and Banco Santander, S.A. (NYSE: SAN) is actually up 2% at $6.40 in New York ADR trading.

The National Bank of Greece SA (NYSE: NBG) was indicated down about 2% at $1.78 despite the Athex Composite Share Price Index trading down 0.2%. The ADRs for Bank of Ireland (NYSE: IRE) are down about 1% in early indications with shares down 1% at the local exchange.

And as far as the larger European banks, the ADRs for Deutsche Bank AG (NYSE: DB) are indicated up 1.5% at $37.30 in New York early trading indications.

JON C. OGG

The National Bank of Greece SA (NYSE: NBG) is down almost 5% at $1.73 in New York ADR trading.  Keep in mind that this had recovered some 50% from its lows in the last two weeks or so. The Global X FTSE Greece 20 ETF (AMEX: GREK) is down only 1.6% at $11.65, and that ETF was up a whopping 7.7% late on Friday afternoon.  The gain Friday would have been like the DJIA rallying more than 900 points.   Elsewhere we are seeing erosion in the ETFs and ADRs of the other PIIGS.

The iShares MSCI Spain Index (AMEX: EWP) is down 3.4% at $23.11 as yields are challenging that 7% hurdle that is so important. Banco Bilbao Vizcaya Argentaria, S.A. (NYSE: BBVA) is now down almost 5% at $6.32 and Banco Santander, S.A. (NYSE: SAN) is down almost 5% at $5.89. The ADRs of Portugal Telecom, SGPS S.A. (NYSE: PT).

Ireland is holding its own with ADRs of The Bank of Ireland (NYSE: IRE) trading flat at $5.71. iShares MSCI Italy Index (AMEX: EWI) is down 2.9% at $10.44 after having seen a 10% bounce from the bottom in the last two weeks or so.

Monday’s post-election trading reaction is not bringing help to the Euro either, as the CurrencyShares Euro Trust (AMEX: FXE) is down 0.75% at $124.97 and the PowerShares DB US Dollar Index Bullish (AMEX: UUP) is up 0.6% at $22.64.

Here is some food for thought… What if Germany just decides to exit the Euro?

JON C. OGG

What is amazing is how much of a recovery has been in the “U.S. plays” around Greece.  The ADRs for the National Bank of Greece SA (NYSE: NBG) have been on fire in New York trading with more than 7 million shares having traded on Friday before 2:00 PM EST.  This is almost 6-times normal volume now, but more important is that the $1.83 price after a 13% gain is more than 50% above the ADRs 52-week low.

Then there is the amazing move in Global X FTSE Greece 20 ETF (AMEX: GREK) with its New York gains being 7.7% to $11.73 on an almost unheard of 115,000 shares traded (8-times normal volume).  Doesn’t this one sound like an ETF that was created just for short sellers? To show just how large of a move this really is… a 7.7% move in the Athens market on a relative basis would be like the DJIA rallying more than 900 points!

Elsewhere we are seeing gains in many of the others PIIGS.

The iShares MSCI Spain Index (AMEX: EWP) is up 0.4% at $23.95 and that is a bounce of more than 10% from the recent lows in early June and the end of May. In Portugal, we are seeing a 1.2% rise to $4.20 in the ADRs of Portugal Telecom, SGPS S.A. (NYSE: PT).

Even the ADRs of The Bank of Ireland (NYSE: IRE) are up 2.5% at $5.64 in New York trading.

iShares MSCI Italy Index (AMEX: EWI) is up 2.5% at $10.74 and that is roughly a 10% bounce from the lows at the end of May and start of June.

The gains are ue in large part to a win-win expected.  If the anti-austerity socialists win then it is anticipated that there will be added liquidity by central banks to make sure that enough liquidity is in the system for day to day operations.  If the pro-Euro group wins the election, then the markets can cheer because Greece will remain in the Euro until the next election cycle.

The Euro is also trying to hold its own as well as the CurrencyShares Euro Trust (AMEX: FXE) is up 0.15% at $125.66.  Conversely, the basket of “dollar versus everyone else” via the PowerShares DB US Dollar Index Bullish (AMEX: UUP) is down by 0.3% at $22.53.

This weekend will bring an interesting news flow and the balance of next week (and much longer) hangs in the balance.

Read Also: The Proposal For Germany To Just Exit The Euro

JON C. OGG

Spain can get all the bailout funds it wants, Greece can argue about staying in the Euro all it wants, and the French can keep claiming that their reason for being is to still get a leftist politician to tax the rich so that 100,000 to 140,000 workers can still qualify for retirement at age 60 rather than 62.  The downgrades in Europe are still going to hit the PIIGS.

We continue to expect that Portugal, Italy, Ireland, Greece, and Spain will continue to face more downgrades.

We also no longer even count Greece as a Euro-Zone nation permanently.  Greece has passed the point of no return and they are going to have to go back to selling olive oil, feta cheese, and living off of summer tourism again.  Oh, and they will have to start paying some taxes.  Either way, more downgrades are coming…

Again, today’s cut was just on Spain.  This was not the last downgrade of the sovereign ratings of the PIIGS.  The major economies of Europe better start preparing for more cuts too.

Here is how the two largest Spanish banks are holding up:  Banco Bilbao Vizcaya Argentaria, S.A. (NYSE: BBVA) is still up 0.7% at $6.52 in New York ADR trading against a 52-week range of $5.57 to $12.13.  Its larger rival, Banco Santander, S.A. (NYSE: STD), is still up 0.7% at $6.10 in New York ADR trading against a 52-week range of $5.19 to $11.89.  iShares MSCI Spain Index (AMEX: EWP) is still up 0.3% at $23.35 and even the large Telefonica SA (NYSE: TEF) is down only 0.55% at $12.24 against a 52-week range of $10.90 to $24.82.

Unfortunately, the markets in the U.S. still have sold off.  It is interesting that U.S. valuations care about Spanish downgrades more than Spanish investment vehicles care.

JON C. OGG