What is Happening in Italy
Italy is more fubar than you imagine possible even taking into account the fact that it is more fubar than you imagine possible. That said, I insist the we are solvent (I am really really and that Italian long term treasuries (BTPs) are a great buy right now.
Please. We need the money. But I am not joking (OK I admit I am not buying BTPs either).
I really have to write about this, since it is the topic of the week and I actually live here. So I will write a long long rambling post (with no useful links).
Update: check corrections at the end of the post.
The current critical situation
Since last summer, Italy has been in play — the price of BTPs fell sharply, that is, the interest rate spread between BTPs and Bunden (German bonds) shot up to around 400 basis point 4%. As a result, Italy enacted a harsh austerity plan with painful spending cuts. The European Union fiscal nagging body (Ecofin) and, more importantly the European Central Bank (ECB) demanded more. This lead to a series of rapidly proposed and revoked emergency plans. The Berlusconi government has agreed on a further do something plan in which sales of public property (mostly land and real estate) play an important role (“First they sell the family silver” H. MacMillan)
The financial system has worked out not necessarily to Italy’s advantage — the latest BTP auction implies paying 6% interest on money raised and the Euro denominated BTP/bund spread is at a record high. The Italian Central Bank claims that Italy is solvent so long as it doesn’t have to pay more than 8%. Investors are clearly not convinced.
Berlusconi’s wish was to temporarily pass this plan as an emergency decree — Presidential decrees temporarily have the force of law until they lapse or are converted into laws by Parliament. His latest problem is that the President in question is President of the Republic Georgio Napolitano not President of the Cabinet Silvio Berlusconi, and Napolitano refused.
The reason for this refusal was that the plan includes the immensely controversial proposal to make it easier for employers to fire employees (Italians employed by firms with more than 15 employees have about as much job security as US public sector employees). This fits the “now more than ever” logic of conservatives proposing the same thing they always propose as a response to every crisis. It is also what happens when you have an internal debate between advocates of austerity and stimulus, finally realize that they are opposites and look for a third way.
Anyway the plan is now a proposed amendment to the 2012 budget bill. Berlusconi has declared the vote on the plan a vote of confidence. This limits debate and prevents obstruction and also means that he will no longer be Prime Minister of the majority of either house of Parliament votes no.
The Political Background
Berlusconi does not, at the moment, have a majority in the Camera dei Deputati (the lower house of Parliament). Various allies have moved their party (or part of it) to opposition. Various individual members of Parliament have switched parties. Less than half of the deputies are now willing to say that they think that Berlusconi should be Prime minister.
This is partly the result of the financial crisis and the unpopularity of austerity, but it is mostly just the we’ve all had it up to hear with Berlusconi and are sick and tired of him (I have been sick and tired of him for 20 years). He always used to be popular for some reason which I could never understand (especially because no one ever admitted voting for him). Now he is very unpopular with a favorable rating in the low thirties. The only major politician with a lower rating is his one remaining important ally Umberto Bossi. Only 35% of adult Italians in a poll expressed support for any of the center-right parties which support Berlusconi. In contrast 45% supported the center left coalition of parties and around 14% supported the coalition of center center parties which used to support Berlusconi but don’t anymore. Also the far left and far right has some support.
It has been repeatedly demonstrated in court that Berlusconi has broken the law. He has chosen not to contest these verdicts (note not accusations). He hasn’t been condemned mostly because of the statue of limitations (which keeps running during trials and appeals in Italy) and partly because of special laws declaring his actions not to be crimes (that would be false accounting) or declaring that the Prime Minister can’t be prosecuted (he can again as those laws were declared unconstitutional as they clearly are). Also sex scandals which are sordid and pathetic and not sexy at all. Also a long record of horrible economic performance under Berlusconi (interrupted by a period of OK economic performance with rapid employment growth during 5 years when he was in opposition). Also, come on it has long been obvious to everyone outside of Italy, and, in fact, everyone who doesn’t rely on Berlusconi controlled TV for their news.
So an amendment which must pass or else Italy might be treated as Greece is treated but at least Berlusconi will no longer be Prime Minister might be voted down. The vote is scheduled for next week. I’m pretty sure the opposition would be willing to vote yes on the condition that Berlusconi resign. He won’t do this.
So what will happen ? Don’t ask me. It is more likely than not that the amendment will pass and Italy will muddle on. The trade unions will not be pleased (they will probably bring two or three million people to Rome to protest — a tiny change in the employment protection law was protested by the largest crowd in Roman history which is long). This will not reassure investors. Also parts of bills can be repealed by referenda and that part of this bill will be repealed.
If the amendment fails, well then maybe investors’ reaction will send Italy to even the bank of Italy admits that things can’t go on this way levels and something will be done. Also even if Berlusconi wins this one he is probably, in Paul Krugman’s words “crostini.”
If Berlusconi is removed what next ? Parliament could decide for early elections. This is a long process as the President of the Republic can only hold them after trying to find a new majority and failing. Elections take a long time. Many members of parliament will lose their jobs (which actually pay well by Italian standards). They won’t like this. So a more likely outcome would be some sort of government of national unity, probably with a Prime minister from the current cabinet. This would reassure investors (surely most AngryBear readers know that when, at a joint press converence, Merkel and Sarkozy were asked if Berlusconi had reassured them, they looked at each other and laughed).
To me the natural candidate is the nerdy tightwad treasury minister Giulio Tremonti who has been fighting for austerity since forever. He and Berlusconi are pretty much no longer on speaking terms (bit of a problem during a financial crisis). The problem is that everyone hates Tremonti, so he isn’t mentioned as a possible national unity Prime Minister.
More likely would be one or another of the underling facilitators of Berlusconi. Yech. Some people dream that Mario Monti the right of center, highly respected former EU competition commissioner might be made Prime Minister. The problem is that Berlusconi will absolutely oppose anyone but Berlusconi (he has never in his life voted confidence in anyone but himself). He still has a whole lot of power. So the government will be weak.
I don’t think it would be good for my health to continue typing this post.
update: Two corrections:
First the current effort to raise money (mostly by selling publicly owned real estate) is an amendment to a “stability bill” not next year’s budget bill.
Second, and more important, the proposed amendment doesn’t include the extremely unpopular provision making it easier to fire workers without proving just cause. Basically, they tried to get the President to do this with an emergency decree, but didn’t dare ask members of parliament to vote for it. The President was a communist so long as the Italian Communist Party lasted, the went with the more moderate part of the party. OK so he was a notoriously boring stuffy conservative establishment communist, but still a communist.
Thank you this article! It’s difficult to get this level of detail (from Boston) from a poorly translated article at la reppublica (google translator struggles sometimes). I think that the markets are banking on Monti, which is why yields haven’t been pushed higher. I didn’t even consider Tremonti as a possible candidate, given his unpopularity. Does Napolitano need ratification from parliament for a nominee of interim gov’t? If Berlusconi loses a vote of confidence, what do you think are the odds of an election vs technocratic gov’t.
It won’t matter who is in charge, people are ignoring the size of the problem in Europe, and that the fix is for Greece and Italy to leave the Euro. Greece, and Italy compared to Argentina.Please. The size of argentina’s default was minuscule in comparison – $70B compared to what could be a $1.5 to $2 trillion haircut in Europe (assuming 50% payback on bonds). Even then the economies in Europe will be hurt, and it will continue to spiral out of control. The Euro will die or just have 2 or 3 members left in the end.
I would never buy Italian bonds. What we are seeing is government authorities pressuring private bond holders to take the loss. So if I bought these bonds the government might devalued them by 50 percent. Why would anyone walk in and let this happen to their money. Greece defaulted. No paying full value on schedule is default.
I am very delighted that you liked my post.
It isn’t just the google translator. La Repubblica reports on recent events for people who have been following the story since the stone age. They never give adequate background. Also their articles are commentary not hard news. We aren’t the only people with this impression. There was a front page article in a major newspaper by a prominent journalist Corrado Agius about how he had spent a month without TV (yes this was front page news — Micheleangelo wept). He said it was very hard to figure out what was going on from newspapers as they are written for people who learned what is going on from TV.
No one considers Tremonti but me. I just noted that he was a natural choice except for the fact that everyone hates him.
Napolitano can name a caretaker prime minister with limited power. This would be totally inadequate (the caretaker has no power over the budget) and isn’t normally done in Italy.
Instead the President asks someone to look for a majority in Parliament willing to vote for some possible cabinet (that person does not have to propose him or herself as Prime Minister — once the person looking for a majority was Nilda Iotti who was a Communist, she discovered instantly that there was not a majority willing to support a Communist prime minister so she tried to find a Christian Democrat prime minister — this is very unusual. The President who asked her to look for a majority was Francesco Cossiga a notoriously close to totally nuts provacateur.
Berlusconi isn’t finished yet. He certainly won’t resign. He will fight to win a majority on all votes of confidence using all means including plain old bribery. Many deputies and senators are willing to take bribes and he is very rich. I promise you I am not exaggerating. So long as he wins confidence votes, there is no way to remove him — President Napolitano can not disolve a Parliament in which a majority has confidence in a Prime Minister.
If mcwop’s figures are correct, things could get very scary indeed.
But here’s the lesson from Argentina…. when the gov’t sold off assets for a song, it kept spending as if the sale of assets was a recurring revenue stream. But once you sell off those assets, they’re gone… and there is no more revenue stream to be had from selling them a second or a third time. For a few years, the whole world bought into that and they were treated like a success story.
I suspect Italy might try to follow the same approach.
“…Many members of parliament will lose their jobs (which actually pay well by Italian standards)…”
I guess you meant “WORLDWIDE standards, ABSOLUTE standards”
“The Italian Central Bank claims that Italy is solvent so long as it doesn’t have to pay more than 8%. Investors are clearly not convinced.”
Nah. They just see now that they left money on the table and want some of it.
Problem is Argentina was simply insignificant. Banks around the world did not hold massive amounts af Argentinian debt. I will try to pull numbers, but the scale of the problem in Europe is massive. It amazes me that people are ignoring this. Greece is even tiny with $500 billion debt. Italy has $2.2 trillion in debt. Add Spain, Portugal to that and we are talking serious money, and bank capitalizations that will be crushed compared to the US housing crisis.
A friend of mine with a bit of historical perspective is rather impressed. It looks like adopting the euro has really brought the French & Germans together, if only to alternately laugh and slap their foreheads as they deal with Greece, Italy, Spain and the like.
Maybe we’ll all get to laugh at this some day.
P.S. Are bond prices reflecting a 50% haircut? It might make sense to invest if they do.
Countries like the United Kingdom, Canada, and Germany, have recently lowered their tax rates to spur job creation and economic growth. Yet, America is sitting on the sidelines doing nothing.
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