Italy: on the verge of a political earthquake… on top of an economic crisis

LISWires Edition based on a conversation of Jorge Nascimento Rodrigues with Fabrizio Goria (Linkiesta)

On the day Ten-year yields on Italian government bonds rose to 6.15%, CDS were trading at 350 basis points, and the MIB index fell 2.53%, for a second day in a row, to 17,272.80, Fabrizio Goria warned on the possibility of a political rupture similar to the one in 1992.

* Ten-year yields on Italian government bonds rose to 6.15%
* CDS are trading at 350 basis points
* Cumulative probability of default is above 26%
* MIB index fell to 17,272.80

Mr Berlusconi’s “lack of engagement” as Guy Dinmore wrote on FT, and “the image of a paralysed Italian government” left the President Giorgio Napolitano, and the governor of the Bank of Italy, Mario Draghi, on the front row. Today, the Prime Minister is going to address both houses of parliament, “aware that market pressure is translating into growing calls for him and Giulio Tremonti, finance minister, to resign.” This were the words of Guy Dinmore, yesterday on the Financial Times.

Italy is on the verge of a political earthquake.

Finance Minister, Mr Giulio Tremonti, spoke yesterday on the phone with Europe’s top economics official Olli Rehn, and today will meet Eurogroup Chairman Jean-Claude Juncker, in Luxembourg.

All cards on the table under severe market pressure.

August 2, JPO, LISWires

Italian Economy: Facts & Figures

* 8th largest world economy, 4th largest in the EU
* €2.5 Trillion Euros of GDP
* €1,900bn public sector debt
* the third largest public debt in the world, 120%, as a ratio to GDP (after Japan and Greece).
* the growth of the Italian GDP in last two decades was anemic.
* 56% of the Italian debt, round €787 Billion Euros, is in the hands of Domestic investors.
* In 2000, the growth of GDP reached 3,75%. In 2010, was 1,3%.
* In the 2008-09 recession GDP had a cumulative fall of 6,5%.
* 2011 Q1 GDP growth was 0,1%.
* €48bn deficit-reduction package passed by parliament last month
* Low expectations on August 5th release of the first estimate of 2011 Q2 GDP

Fabrizio Goria’s Views on the Italian and European Crisis

Profile: Fabrizio Goria is a 27 year financial reporter for Linkiesta,
a new online Italian newspaper (based in Milan and Rome)
established also by former UniCredit CEO Alessandro Profumo
and a group of Italian entrepreneurs, bankers and lawyers.

Fabrizio Goria

On August 2nd, Jorge Nascimento Rodrigues interviewed Fabrizio Goria (Linkiesta) for Expresso, the Portuguese weekly: “À espera de um terramoto político em Itália”. The original interview, in English, is published at his blog Geoscopio.tv.

Headlines on Italian current Political Crisis

* situation similar to 1992 (see background, bellow)
* Tremonti and Berlusconi are politically finished
* Prime Minister Silvio Berlusconi leadership is weak. He lost the last regional elections, with Milan and Naples, two strongholds, moving to the left.
* Finance Minister Mr Giulio Tremonti risks becoming involved in a scandal, a rented house case in Rome, paid by his advisor, Marco Milanese, who is under investigation. Milanese was an officer of the Guardia di Finanza, the Italian tax police, and he said he corrupted politicians and businessmen. Mr Tremonti has denied any wrongdoing.
* There is uncertainty on the future of Berlusconi and Tremonti.
* On August 2nd, the Financial Times signed an obituary for both.

Background on “The 1992 Italian Mani Puliti”:

* the period of 1992, was marked by deep political crisis, a rupture of the political fabric and the process Mani Puliti (Clean Hands).
* Tangentopoli, was a huge corruption scandal that destroyed the old Italian political class.
* Silvio Berlusconi took power after an obscure period of political transition, with weak economic growth.
* George Soros’s move against the Bank of England, weakened Italy.
* Rome had to devalue the Lira and so the country restarted, with many sacrifices by Italians. Italy had to enact a budget of 90,000 billion lire with the government of Giuliano Amato, who taxed the savings of the Italians.

On Italian banks, debt and default:

* Italian banks are under pressure because of the debt in their portfolios, which is suffering mark-to-market write-downs.
* Italy is too big to bail, there is no interest in bringing down one of the founding countries of the European Union.
* I don’t think Italy will default.

On July 21st EU Summit:

* It didn’t calmed investors.
* Greece had a new bailout because Germany wouldn’t pay the bill for the EU.
* Contagion to Spain and Italy is still an issue.
* Europe missed an opportunity to be more united.
* France and Germany decided to save all their banks and have divided Europe between core and periphery countries.

On Greece:

* French banks have €64bn exposure to Greece and
* German banks have €40bn exposure to Greece, (according to BIS data).
* Berlin and Paris have a lot of interest to save Greece, especially for their banking stability.
* The problem is that Greece is in default and Europe has no mechanisms for crisis management.

On Europe:

* Europe doesn’t have mechanisms for crisis management. Mr. Trichet did well in monetary policy after August 2007 turmoil and after Lehman Brothers collapse, but he is not alone in the decision process. In the Eurozone there are 17 countries with 17 different interests. The stronger (France and Germany) take the command.
* Europe is only at the beginning of the worst crisis of its existence. We can only hope that it will be less harsh as possible.

On EFSF:

* with just €440 billion euro, the EFSF cannot reassure markets. I guess it must be recapitalized, probably with €2 trillion as Willem Buiter (Citi’s chief economist) said on August 2nd, to FT.
* the EFSF – European Financial Stability Facility looks like the TARP (Troubled Asset Relief Program, US, 2008). And it should’t.

Source: À espera de um terramoto político em Itália | Jorge Nascimento Rodrigues | Expresso | Geoscopio.tv
English Edition by: JPO | LISwires

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