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Tuesday, December 11, 2012

Silvio: Who cares about increasing borrowing costs?

We noted on our blog yesterday (and in a piece in today's City AM) that Silvio Berlusconi was likely to opt for populist, anti-austerity (and, potentially, anti-German) rhetoric to regain some ground ahead of the Italian elections.

It took Il Cavaliere 24 hours to prove us right. He told Canale 5 this morning,
The fact that the elections have been brought forward following Monti's resignation is irrelevant, because we are talking about [holding them] just over a month earlier. Therefore, there's absolutely no real reason for the markets to be upset. 
With regard to borrowing costs, let's stop talking about this imbroglio, please. No-one had ever heard about the spread before. We have only heard about it during the past year. Who cares about how much interest we pay to people who invest in our [debt] obligations compared to what is paid to investors who invest in German public debt?
When the euro was introduced, we used to pay a 4.3% [interest rate on our debt], and Germany used to pay a 3.3%. Germany then decided to do one thing in its own interest. It ordered all its banks to sell all the Italian Treasury obligations they had in their coffers...The other American and international funds thought, 'Well, if Germany is selling [Italian debt] there must be something wrong with it.' So they started selling too. 
What matters to us is that the interest rates [on our debt]...have gone up by 2% - which, in a year, means less than €5bn to be added to the €80bn [Italy pays] to service our debt.
Therefore, all the stuff that was invented about the spread is a real imbroglio. The truth is that the spread was used to try and bring down a majority voted by Italians.
Enough German-bashing for one day? Nope,
I was one of the 2-3 most influential leaders in the European Council...[but] I continuously opposed German proposals and demands. I said 'no' when Mrs Merkel was demanding that Greece suffered cuts which, in my opinion, would have brought Greece - as it then happened - almost to civil war. I said 'no' to the Tobin Tax...I said 'no' to the fiscal pact, and I even used the veto...to flag up that Italy could not commit to reducing its [public] debt by €50bn a year.
As we noted before, it will be interesting to see how receptive Italian voters will be to this kind of rethoric - and if the promise of an end to German-imposed austerity will make them forget about Berlusconi's trials and all the rest. 


Anonymous said...

Fantasy policy in Italy?

It is more and more clear that this policy of “muddling through” is not working and on the contrary it has had some perverse effects on the real economy of weak European countries with additional potential systemic risks due to the increased feedback loop with their own banking system.

It is also obvious that the Eurocrats/Troika undemocratic policy is putting an increased burden on taxpayers shoulders of stronger northern European countries by requiring a continuous lending of funds (bail-out), most of which will never be reimbursed. A policy of just austerity (such as that implemented by Mr. Monti in Italy over the past year) has not only been socially unequal because based on taxes which have mostly affected retired people and salaried workers without cutting unproductive public expenses and privileges of corporative interests (financing of political parties, central and local misuse of public funds, corruption, tax exemption of the Church real estate properties that amount to 23% of all Italian real estate, we could go on at length…..) but has also increased the domestic inflation rate at around +3,3% (soft financial repression which adds to the loss of households purchasing power): so summarizing one years’ experience in Italy we witness a substantial drop in GDP (-2.4%) , a marked increase of unemployment (the real country average is probably approaching 20% and the youth unemployment is closer to 35%) as well as a jump into the public debt/GDP ratio to 128% (actual stock around € 2 Tr). Only the 10-yrs bond spread between BTP and Bund has decreased but just because of the “helicopter spraying” of nearly cost-less money by the ECB.
So, this policy is clearly not working (apart from the viewpoint of banks and creditors'vested interests that got a huge wealth transfer from households and taxpayers)and the potential future social consequences go from bad to worse.

It does not take Mr. Roubini or Mr. Sinn's suggestions (although as valuable as they are: Mr. Sinn's road map for the Eurocrisis solution is probably the most serious practical proposal made so far) to understand that the faster this muddling through approach stops the better it is and such a stop would require: a substantial haircut of public debts, a temporary exit from the euro monetary union with subsequent restoring of trade competitiveness for weaker countries, and in parallel a serious commitment to austerity mostly on spending cuts.

Although his chances of success are rather low, if Mr. Berlusconi succeeds in the next political elections and, unlike Mr. Bersani avowed future policy, he is no longer willing to support Mr. Monti/Napolitano approach, (with a loose coalition of Lega Nord and Italia dei Valori parties and possibly an external upholding of Movimento 5 Stelle)Italy will be compelled to stop this nonsense muddling through: the quicker this catharsis comes the better may be otherwise the country risks losing an entire decade of growth and working opportunities for a generation. We can’t envisage at present a return to real economy growth with debt/Gdp ratio above 120% for all thus decade.
If this is the outcome of Mr. Berlusconi’s return (apart from his own, obvious personal interests), northern countries taxpayers would have to cheer him because they will end wasting their own savings into bottomless pits (a more suitable definition of current bail-outs). And, since they might realize sooner or later in Germany that Ms Merkel is actually going to confiscate their own savings, they might even not reappoint her next October: and Mr. Berlusconi will bask into his revenge against the Merkozy duo!
Italian paradox: will Mr. Berlusconi save Italy and German taxpayers?

Rollo said...

Everyone thinks he is an idiot. But he is not. He is immensely rich and powerful, and you do not get there by being an idiot. And of course he is right. Italy will fall out of the Euro. They will default. They will pay off their bonds at 37% of face value. And Italy will carry on thriving with the new Lira.

Anonymous said...

Clearly the Conservative led and LibDem supported coalition does not care about borrowing and the increasing costs. Quite obviously Labour do not worry about it as they spent without limit and propose even more than George and Vince want to spend.

We will all be upset when interest rates on medium term government debt increase dramatically as a result of any loss of AAA credit rating OR the fright by international lenders. Increasing inflation, which has been undeclared government policy since 2009, will bite and drive up borrowing costs and drive down the economy and per capita income.

Macmillan, Wilson and Heath blamed gnomes and trades unionists - who will Cameron or the next Labour PM blame?