Archive for the ‘Investment’ Category

One of the very worst?

April 19, 2016

I am loath to post the following article from today’s Guardian because it concerns a woman who is subject to sexist abuse. However I cannot help feeling that Marissa Mayer’s compensation at Yahoo for doing zero (okay, less than zero) for shareholders is one of the most egregious cases of rewarding failure that we have seen. She had nothing to do with the investment in Alibaba 10 years ago that is the only reason that the share price has recovered somewhat of late. The money she personally will have stripped out of the business by the time it is sold is grotesque. And the only people who should be more ashamed than her are the board members who let her do it.

From The Guardian:

What’s the price of failure? For Yahoo’s boss Marissa Mayer it could be about $137m. Bids are now in for the ailing tech company – and no matter who gets it, Mayer is set to be one of the biggest winners.

Mayer has taken home $78m since she was installed as CEO in 2012, according to stock analytics firm MCSI; if she’s dismissed from the company after a buyout she’s set for another $59m, based on the terms of the company’s most recent proxy statement.

Mayer’s performance pay and vested options peaked in 2014 at $48m (double the previous year’s salary). Yahoo has yet to finalise this year’s pay package so the final figure is yet to be determined, but few are expecting her to take home just her base salary, in excess of $2m.

Despite the company’s fundamental problems – it has lost the ad wars to Google and Facebook and bet billions on new businesses that have failed to take off – Yahoo’s share price is still in better shape than it was when she started. The rally in the stock price is entirely due to its holding in Alibaba, China’s largest e-commerce company.

Shares are close to their mid-2014 levels, in fact, and that probably means Mayer is owed further cash.

Mayer has benefitted from a low “strike price” for her stock options. In 2014 it was $18.87 – and the day those options were granted, 27 February 2014, shares were worth more than twice that.

On Monday, Yahoo’s share price closed at $36.52. History suggests that Mayer will be entitled to buy those shares at a price far lower than that. Although her strike price for 2015 has yet to be released, it is expected later this month. Given that there are bids open for Yahoo’s core assets, however, experts say that filing may be delayed.

While nothing is cut and dried yet, the smallest amount Mayer could make at the company is about $80m if she receives absolutely no more of her long-term incentives.

“Until the new proxy is out it isn’t really possible to say how much Mayer will ultimately end up making, or to what extent she will be entitled to any additional severance amounts,” said MCSI’s Ric Marshall.

Marshall is MCSI’s executive director of environmental, social and governance research at the firm and he says much of the eventual compensation depends upon the decisions of the board: “What you can’t say is how the committee will evaluate the performance and what percentage of the original target they will deem as having been met,” Marshall said.

Investors see the board as unduly supportive of Mayer. One group, Starboard Value, asked that the entire body be replaced with members of its own choosing.

There is reason for shareholders to worry: Starboard thinks that the net value of the “Yahoo stub”, that is to say, Yahoo without its stake in Alibaba, is worthless. With the amount of money a purchasing company would have to pay Mayer to leave in the event of a change in ownership – $59.3m in numbers adjusted for share price from the company’s most recent proxy filing – Yahoo’s value by Starboard’s reckoning would be negative.

“The firm buying her knows all about this,” said Alan Johnson of compensation consulting firm Johnson Associates. “They’re not going to pay for it. That’s coming out of the hide of Yahoo’s shareholders – everybody’s got that in their spreadsheets. They look at this as another sunk cost, like a bad lease.”

In a word, Starboard is afraid shareholders may end up having to pay someone to haul Yahoo away.

Marshall told the Guardian he’s seen that happen in the past. “It has been proven more expensive to sell a company because of the change in control than it is to just bankrupt it.” He hopes it won’t be the case at Yahoo, he said.


Bad week for Brave Dave

April 7, 2016

Ooh, these bloody Panama Papers.

It’s like having Edward Snowden as your next-door neighbour for Brave Dave Cameron, as The Guardian goes to work on his family’s offshore tax arrangements.

I believe there have so far been four, very carefully-worded, separate statements from Downing Street and Cameron himself on the question of offshore family businesses, trusts, and the beneficiaries of these (tabloid list here). Downing Street kicked off with ‘It’s a private matter,’ but that was very quickly kicked into touch. Let’s hope that with this succession of ‘clarifications’ Brave Dave is not heading in the direction of Bill Clinton’s immortal ‘It depends on what the meaning of “is” is.’

Two things so far reported by The Guardian stand out for me.

First, Brave Dave’s old man, Ian, was listed by the Sunday Times Rich List as being worth £10 million. But in 2010, Brave Dave had a publicly declared inheritance from his father’s estate of only £300,000, just under the £325,000 death duties tax threshold. There are four Cameron siblings, so one wonders where the rest of the loot is? Or perhaps what one would like is an explanation as to why there isn’t any more inherited or inheritable loot. Did Ian have a flutter on the horses, perhaps? As The Guardian notes, Brave Dave said in 2012 that he would be willing to publish full details of his tax affairs, and this seems like a jolly good time to do it.

Second, Ian Cameron’s company Blairmore (surely ‘moreBlair’?) was window-shopping offshore financial centres and paying zero UK taxes even as Brave Dave became Conservative Party leader and began to rail about the moral iniquity of not paying tax as you should. See here for a Brave Dave versus Jimmy Carr ‘Whose tax arrangements might turn out to be less funny?’ comparison. The key is whether Brave Dave’s immediate family benefited, or will benefit, in any way, at any time, from Ian’s quite legal but morally unpleasant tax avoidance wheezes.

Poor old Brave Dave. Why isn’t this happening to someone less agreeable? Like Boris. Or the Thin Controller.

Later, more:

Well, just this evening Brave Dave has gone on tv and admitted he’s done a little bit of a porky pie. He sold some shares in moreBlair just before becoming PM for a profit of £19,000. This is the fifth ‘clarification’.

Is it enough to draw a line under the affair? Dave is surely hoping so. But I can’t quite see it myself. £19k doesn’t quite fill the hole on the back of my envelope. Although, it is just an envelope…

Here is The Guardian report.

Friday, 8 April, more:

The Guardian‘s Juliette Garside parses Brave Dave’s television interview of last night, here. See her comments down the right hand side. The trail, me suspects, leads to the sleazy island of Jersey… Odds on Brave Dave resigning have shortened from 20/1 to 11/2. Still a reasonable earner. And tax-free, too. I might send a child in a trench-coat over to the bookies’ to put down a tenner.

5 minutes later:

Jesus, Mary and Joseph. Odds on Brave Dave going this year are now 5/2

Monday, 11 April:

This is excellent, from today’s Guardian.

Will it be another bad week for Brave Dave? Over the weekend, Downing Street published a short and sanitised introduction to Dave’s tax affairs. Not even worth posting, since it is just spin. The pressure continues to mount for Dave to take his pants off, and reveal the full story. And the Thin Controller is feeling the heat too. The Treasury said last week he would not publish his fiscal break-down. Now Treasury is hinting he might offer up something. And there are loud demands to know who across the entire cabinet has offshore interests.

I feel so sorry for the Tories that I have posted the leaflet of their local council candidate in my house window. No one on my whole road votes Tory to my knowledge. So someone has to stick up for these poor rentiers…

Monday, 11 April, later:

The Thin Controller has published his 2014-15 tax return:


£3 interest on money in the bank. A timely reminder of how the poor, who have nothing but a little cash in the bank, have been royally screwed by record-low interest rates while the rentier class makes out like bandits from asset appreciation fuelled by cheap debt.

£33k is the Thin Controller’s half-share (wife has the other half) of one year’s rent on his London property.

£44k is dividends from Sloane-apocalypse wallpaper business Osborne and Little.

Effective rate of taxation on the whole lot, earned an unearned (including 120k salary) is 36 percent.


And Boris has published his tax summary. Unlike the Thin Controller, he has given us multiple years (what’s going on there, George?).

Boris tax summary

The highlights:

In 2014-15 Boris pulled down £266,000 for his pisspoor Daily Telegraph column. He claims to knock out his columns ‘very fast’ on a Sunday morning, and they certainly read that way. The latest lauds Assad for having saved Palmyra from Isil.

In 2014-15 Boris earned £224,000 in book royalties, reminding us that the British public prefers to read this, when it could be reading this.

Add in the Mayoral salary for London and Boris made, gross £612,583 in 2014-15. Although there is no way he will be elected prime minister, I think he comes out of the this tax return publishing episode better than either Brave Dave or the Thin Controller. No offshore filth. No rentier income, either from bricks and mortar or from daddy’s business. Boris does actually earn his money. Which is why he pays a significantly higher effective rate of taxation than the Thin Controller. Ah, the logic of our times…

The Thin Controller

March 21, 2016

Osborne weight loss

George Osborne, who I used to call The Fat Controller, has become the Thin Controller after eating less and running more. But he is still Sir Topham Hat, insensitive nemesis of poor Thomas the Tank Engine (and all other members of the working classes).

In case you missed the Thin Controller’s latest, last week he decided to reduce taxes for the rich and the middle classes at the same time as chopping a further £4.4 billion over five years from the budget to support disabled people. The Institute for Fiscal Studies estimated that 370,000 people with a disability would lose an average of £3,500 a year. This comes on the back of an already-implemented big squeeze on various direct and indirect forms of welfare support for the disabled.

Most of the groundswell of anger at the Thin Controller — he has already abandoned the disability benefit cut in a standard ‘oh my god, what have I done this time?’ volte-face  — focused on his increase to the level at which higher earners begin to pay the 40 percent income tax rate. However this change has at least the merit of rewarding middle class work.

What gob-smacked me in the Thin Controller’s budget was the decision to make big cuts to already ridiculously low rates (compared to income tax rates on work) of Capital Gains Tax (CGT). Britain is fast becoming a rentier society, but the Thin Controller’s determination to turn us into some proto-feudal squirearchy seems to know no bounds. He cut the lower band of CGT from 18 percent to 10 percent, and the higher rate from 28 percent to 20 percent.

The old rates do remain in force for profits on one’s second, third, fourth and fifth, etc homes (i.e. for non-primary real estate). However the adjustment is a huge bung to the share- and bond-owning leisure class, of which I regard myself as an aspiring member. Thinking today about whether I should not perhaps take the next three months off and go on safari, I decided to check the HM Revenue and Customs web site and learn more about the Thin Controller’s commendable policy to encourage my indolence. Here is what I found:

<Policy objective>

<The government wants to create a strong enterprise and investment culture. Cutting the rates of CGT for most assets is intended to support companies to access the capital they need to expand and create jobs. Retaining the 28% and 18% rates for residential property is intended to provide an incentive for individuals to invest in companies over property.>

This statement has three great qualities. First, it is pure gibberish. Companies (the supposed subject of the second sentence) do not pay CGT, they pay Corporation Tax. Second, it is dishonest. Following from 1., what the Thin Controller really means is that he wants to support the stock-owning rentier class, who don’t need to work because tax rates on passive capital invested in shares and bonds were already low, and are now even lower. Annoyingly, he can’t actually say this, but we know who we are. Third, the statement is misguided. This is because no British rentier with half a brain is going to invest much of their unearned capital in British companies when the Thin Controller has created such an anaemic growth environment. One gives one’s capital to American companies like Apple, Amazon, Skyworks, Gilead, Amtrust Financial Services, American Express, American Tower, Verisk Analytics, and so on. (Disclaimer: oh yes, I own them all.) And then one pays sod all tax to the Thin Controller on the profits. Of course, in the final analysis this doesn’t matter because the Thin Controller doesn’t need the tax because he’s dismantling the welfare state.

Got it?


How bubbly?

May 18, 2013

The FT decides that what I predicted in 2010 has already come true — namely an equity market bubble. I have been thinking about this myself and am more prone to concur with Krugman that this is not yet a bubble. Meanwhile, the answer to one of the sub-questions Krugman poses — about the strength of corporate profits in the last two years — is probably the one given by Hyman Minsky. Minsky argued that financial crises in countries where governments are a large share of the economy are perversely good periods for corporate profitability as costs fall but government steps in to make up for missing private sector demand (in this latest case more with QE than with direct fiscal action, but with a fair bit of the latter in the US).

Another sub-question is why employment has held up much better in the UK (less fiscal stimulus versus the US) than almost anyone predicted (see charts below showing forecasts by the British government’s Office of Budgetary Responsibility. Graham Gudgin, who provided these graphs, argues that employment has been better than expected in Britain because very low interest rates have benefited firms’ cash flows (highly sensitive to interest rates) and encouraged them to hang on to staff, even as they rein in capital expenditure. Firms can be profitable and maintain reasonable employment levels even as they doubt the economic outlook. This sounds plausible, but if true it suggests, as Gudgin further argues, that unemployment is unlikely to fall more as QE is reduced, and then interest rates rise. In other words, on the present policy trajectory, the employment outlook in the UK is less sanguine than most people believe.

Gudgin image 1

Gudgin image 2


Tangentially related, here is a piece from John Kay from earlier this month that is worth reading if you want to understand the sneaky moves George Osborne is making towards creating a British Fannie Mae (60 years after the US one was actually needed), and thereby creating off-balance sheet financial risk in a manner that both Blairite and Cameronite governments been guilty of. As Kay says, Osborne should support the construction sector by increasing housing supply by on-the-books investment, not through voodoo accounting that encourages more turnover of the existing stock of property. It is hard to know whether to dislike him more for the narrowness of this thinking or for his political sliminess.





Nakries, Bothschilds, torpor

February 22, 2013

Rothschild 1


Inbred Etonian titty Nat Rothschild takes on legendarily dodgy pribumi carpet baggers, the Bakrie brothers (led by Rothschild lookalike Aburizal). I guess the takeaway is that there is little to choose between the British aristocracy and a bunch of Third World wideboys when it comes to moral conduct. The Bakries have been coining in money in Indonesia ever since the Benteng programme of the 1950s was set up by Sukarno to support ‘downtrodden’ indigenous traders. They weren’t downtrodden then, and they aren’t now. The Bakries made a killing out of exclusive trading licences that did nothing to support Indonesian development. Nat ‘Mr Offshore’ Rothschild, meanwhile, showed how naturally at home he is in a south-east Asian, Latin American or Russian business environment by cutting a deal with the Bakries to ‘reverse list’ their coal assets in London. This is a favourite Third World tycoon game whereby you find a failed listed business and have it take over your real business, thereby avoiding the intrusive due diligence and transparency that can go with an Initial Public Offering. Nat then got in a terrible bait that having gone into business with some of the dodgiest characters in Indonesia they turned out to be dodgy. (His own efforts to ‘tool up’ by bringing in the likes of Hashim Djojohadikusumo, a B-grade tycoon and elder brother of former Indonesian special forces commander Prabowo Subianto, were a flop.) Meanwhile, despite the recent global financial crisis, British regulators let the entire sordid affair carry on, presumably on the assumption that British aristocrats who live in Switzerland can be trusted to keep their own moral counsel. What happened afterwards with the London-listed business is precisely the sort of shenanigans and fleecing of minority shareholders that happens in places like Indonesia. Quelle surprise!

The Guardian explains some of the background.

Here is the Bloomberg coverage.

Here is the FT coverage (subscription needed).

10 cents on the Euro

August 20, 2011

Here’s a weekend snapshot of the death throes of Italy’s financial system…

On a five year view, the share prices of the country’s big 3 banks are close to being — in strict terms — decimated. Intesa SanPaolo is worth about 15 cents of what it was, Unicredit 12 cents, and Monte Dei Paschi di Siena has already breached the 10 cent barrier.

Both Intesa and MPS are well below their previous financial crisis lows of March 2009.

On recent trends, next week should see all three big banks in decimation territory. The main reason, as discussed here, is their exposure to Italian public debt.

When a bank’s share price is decimated, what happens? Other banks will not lend to it, lest they fail to get their money back. The interbank market closes its door. That may already be happening since the ECB conceded this week that it extended significant funds to one unnamed institution.

As well as buying up all Italy’s debt as it rolls over, the ECB may in the next few days begin funding all its banks as well.

Still, as Frau Merkel and Sarko like to point out, it’s not like they have agreed to issue Eurobonds.

We should get a number on Monday for what the ECB spent in the full week up to last Wednesday on Italian (and Spanish) public paper. My guess is we are in for a monster. Northern European taxpayers will want to avert their eyes.

My own bank is Monte dei Paschi (motto: ‘Medieval bank, medieval service’). I was in there on Friday, discussing the unannounced interruption of my e-banking service (apparently anyone who had not used it for three months was cut off for ‘security’ reasons; I have now been restored). The friendly staff, in their ridiculously spacious branch, didn’t seem fazed by the fact their employer’s market capitalisation is now less than US$3 billion and headed for zero.

Perhaps they think it will be more fun working for a foreign bank? I very much doubt it will be. When the IMF comes in, MPS has to be the prime candidate for takeover by a foreign institution (HSBC? StandardChartered?). My guess is that Italy will be forced to throw at least one of its big banks to the foreign dogs in order to satisfy the IMF’s deregulation strictures, and number three is perhaps the most likely to go. MPS has so far survived 540 years, but this one may be a year too far (though I do not know to what extent MPS’s incorporation structure provides a defence against takeover… it may appear to provide protection, but when the IMF shows up, all bets are off).

Hold on tight now.


Update, Monday 22 August:

The ECB today confirmed Euro14 billion of government bond purchases under its Securities Markets Programme in the week to last Wednesday (11-17 August), less than I had been expecting. Still, we are at Euro36 billion in two weeks, and rising. Meanwhile the Bundesbank explicitly criticises the reactivation of the bond purchase programme in its latest monthly bulletin, jacking up the political pressure in Germany. Stock prices of IntesaSanPaolo and Unicredit continued to fall today, despite a small rebound in European markets; the most bombed-out counter, MPS, rose.

Here is the full history of SMP purchases since May 2010 (ie. Rounds 1 & 2).


August 15, 2011

The European Central Bank has revealed that it spent Euro22 billion buying bonds in the first two days of last week, almost all of which would have been Italian and Spanish paper. Italian and Spanish bond purchases were only authorised from last Monday. I gave a detailed view on the structural story here, on Italy’s unconvincing promises to sort itself out here, and my take on the reality behind last week’s equity panic here.

So: in its first two days the ECB spent almost one-third as much as it did in its (wholly unsuccessful) multi-month bond buying programme for Greece, Ireland and Portugal (Euro74bn). It is nice that the admission comes on the same day that Merkel and Sarko reiterated there will never be any Eurobonds, not ever, ever, ever, ever, ever, jamais, niemals…  (FT sub needed).

Meanwhile sellers of Italian (and Spanish) debt have had their starter and are looking towards the kitchen door. But as they savour the flavour on their palates, what is that rather unusual smell coming from within? I know! It is the aroma of German taxpayer money burning…

Noise (and not)

August 9, 2011

The equity markets threw quite a tantrum on Monday and on Tuesday morning, but Mr Market appears to have found his valium.

Wednesday evening insert: 

Strike that! Mr Market picked the wrong bottle and actually took some acid. He’s freakin’ out again.


What is the American equities terror all about? Not much as far as I can see. Noise.

I am no Bernanke groupie, but the message from the Federal Open Markets Committee Tuesday looked about right. No immediate promise of QE3. It isn’t needed yet and given the epicentre of crisis at this point is in Europe (see next par) it is hard to see how US government debt yields are going to be pushed significantly up. There was an FOMC promise of long-term cheap money, but everyone expected that anyway. The US may just (unlike the UK) continue to crawl towards recovery. If not, there’s time.

The real story is on two different fronts. The first is the European sovereign debt crisis, where the ECB is applying to Italy and Spain the medicine that did not work for Greece, Ireland or Portugal — buying the bonds of a country that cannot otherwise afford to service them. For Spain, at least this may be a useful subsidy while the country makes further adjustments to ensure its independent fiscal survival. But for Italy, it is simply a matter of how much time elapses before the market remembers that Italy cannot get its act together. I can’t see how this can take very long at all. The trigger for renewed panic in the debt market, however, could be one of many: German politicians decide unilaterally that they have had enough of Italy; Italian blue collar unions affirm their intransigence; Berlusconi opens his mouth; some new scandal breaks; the ‘professional’ classes go on strike; or the sheer scale of what is entailed in buying Italian (and Spanish) debt sinks in — the total the ECB spent on Greek, Irish and Portuguese debt last year and this was Euro74 billion; it will likely be asked by delighted sellers to buy that much Italian (and Spanish) debt within a month.  Waiting for one of these things to go bang is a bit like watching old episodes of Dallas: predictable.

More interesting perhaps is what is happening on the China front, another key to the rebalancing of economic and political relationships that must happen before this crisis is over. Here we see what can be construed as the method in American madness. The S&P downgrades of US debt and the hoo-ha about a possible QE3 is backing the Chinese leadership further into a corner it hardly even realised it was in. There was old China, all tough and proud with a couple of trillion dollars of US dollar-denominated foreign exchange reserves (out of a total of more than three trillion USD-equivalent). Everyone was all afraid of the big panda that was buying up all the forex. But suddenly the Chinese government doesn’t feel so clever buying USD in order to depress the Renminbi exchange rate. So what else do they buy? Euros? Ho, ho, ho. Japanese Yen? Hee, hee, hee. Sterling? Ha, ha, ha, ha. There aren’t enough Swiss Francs or Swedish Krona to last China a week. And if it buys gold, what happens when the crisis is over and the price falls off a cliff?

It is no fun at all being the Chinese government right now and the path of least resistance is to let the Renminbi appreciate. The central bank allowed it to shift a quarter of a percent in a day when the S&P downgrade was announced, to 6.43 to the USD. (This would be nothing in a free market, but it is a big jump for China.) The official news agency, Xinhua, has taken to running political commentaries demanding the US guarantee the value of Chinese investments, which must have the China people in Washington rolling on the floor and slapping the carpet. At least someone is having fun. The more the Renminbi appreciates, the  better the US net trade position becomes. The process also imports some inflation into the US, which is good. And the rising Rmb becomes a self-fulfilling prophecy as speculative capital moves into China in search of higher interest rates and a rising currency. Basically, China either lends America cheap money to fund the deficit, or it takes the (upward) currency hit. They ain’t feeling so forex macho any more.


Sloppy graph of USD-Rmb exchange rate:  USD Rmb Sep10 to Aug11

And in the news:

Appreciation does not prevent a monster Chinese July trade surplus (FT sub needed). But imports, year-on-year, continued to rise faster than exports and the growth gap widened a little versus June. Going forward, it is worth bearing in mind that China could still see increasing trade surpluses as the Rmb exchange rate rises and exports slow, by virtue of falling domestic investment and hence lower capex imports. This would be consistent with the huge trade surpluses of the mid-1980s in east Asia which caused the US to put its revaluation gun to the head of Taiwan and Korea in 1987. However the trend to narrowing surpluses and a positive impact for the US economy is my base China case.

The Renminbi kicks on following yesterday’s FOMC statement.


Latest from not-so-gay Paris and not-so-dolce-vita Roma: (FT sub needed)

Zoot alors! King Sarko summons his ministers as selling fever turns on Italian bond-laden French banks. Pas bon: this FT story focuses on the sell-off of French bank stocks today, but notes further down that the Italian big 3 banks also got a caning. What is really telling, I suspect, is that French and Italian banks that own Italian (and other toxic) debt fell by double digits today, even as Italy was able to sell new bonds at lower interest than a few days ago (figures in the freakin’ out again link if you need them). Would that be because a few days ago the ECB wasn’t buying Italian bonds?


August 7, 2011

The country with more laws than any other in Europe, and whose institutional failure is based squarely on its inability to enforce its laws, has promised to overcome the financial crisis by… writing more laws.

The main points of Friday’s announcement at the Berlusconi-Tremonti press conference (FT subscription needed) are constitutional amendments requiring a balanced budget and the liberalisation of an as-yet undefined list of professions.

Perhaps Berlusconi and Tremonti forgot that their country signed a European Stability and Growth Pact in 1997 — two years before joining the Euro — that limits national debt to 60 percent of GDP. Perhaps they are unaware that in Italy the law says you must wear your seatbelt and stop at zebra crossings. Perhaps they have not read the constitution they plan to amend, and all the wondrous things it already promises which do not exist in Italy (more below).

It will be a wonder if the markets buy into this bullshit beyond 9am on Monday morning.

The S&P downgrade of US debt (FT subscription needed) allowed the weekend press to spend much of its time speculating if the US faces panic on Monday. I doubt it. Everything is relative and everything, ultimately, is about the capacity to pay.

Which is why, sooner or later, either the IMF comes in or Italy defaults.

There is, I think, a reasonable case that it would be better for Italy to go for a negotiated default and leave the Euro area. An exit is perhaps the one thing that could wake Italians up. (My ideal would be to kick Italy out of the EU completely and — so long as it would concede historic culpability for the Armenian genocide — let Turkey come in at the same time. I think that might just get the message through.)

Infinitely more likely, however, is that Italy continues its historic oscillation between puerile nationalism and running to mummy, in the form of the United States or the European Union. The EU has shown it lacks the discipline to help Italy, and so in any rescue in this crisis the heavy lifting will have to be done by (mostly American) IMF staffers backed by ECB funds. Apart from the fact that most of the money will be European this time, we are I suspect looking at 1945 deja vu all over again. A bunch of foreigners come in and tell Italians how to run their lives. It is utterly depressing that this is necessary. But I hope the guys and girls at the IMF are getting ready, because it will be necessary. I will write more about the task they face when it is clear they are on their way.


Sunday evening at 11pm the ECB puts out a press release, point 6 of which appears to mean it will start buying Italian and Spanish government bonds as soon as Monday morning. Guess they believed Matilda more than me then…

ECB Sunday 7 August 2011


Mamma’s here. Those ECB folks grabbed a couple of hours sleep Sunday night, jumped out of bed, and started buying Italian and Spanish bonds (FT subscription needed) as soon as the markets opened Monday. The FT says bond yields are ‘tumbling’. Looked at the other way round, the ECB is offering far better prices than the market and grateful sellers are jumping with joy. What we want to know, of course, is the volume. We should start to get some information later in the day. My base case remains that this will be a very temporary respite.


Much as I love the FT, I cannot believe how far behind the curve it is on this story today. You are better off reading Bloomberg for free:

Mostly this and then this.

The markets know that the ECB has neither the money nor the cojones for the job in hand and are headed south. G-7 is wittering on about hanging tough and doing everything necessary. It is time for the IMF to cancel all holiday. The end is nigh. I just wish I had cash to buy distressed equities — but I guess this is god’s way of punishing me for being a writer.


It wouldn’t be Italy if:

Some magistrate from some town you never heard of didn’t order police to raid the Milan offices of the ratings agencies because the financial crisis is clearly a satanic//American/British/etc conspiracy.

Links in Italian: 

Corriere della Sera reports the presser (Note how Italy’s most cosmopolitan newspaper refers to the US Secretary of the Treasury as Mr Timothy).

An editorial in the Corriere is interesting inasmuch as it refers to ‘a wave of speculation’ and ‘irrational’ market movements. Is it irrational to sell off Italian debt? I, personally, do not think so. If Italians do, they have the private savings to fund their debt domestically, so perhaps they should buy up the paper that is being sold. It would be a solid investment for them and it would show their trust in the reforming credentials of their government… Less cynically, I was struck at a party with Italian professionals on Saturday how receptive otherwise very smart people are to the notion that Italy is indeed the victim of some new and terrible global conspiracy.

The constitution:

Background to Italy’s 139-article constitution — one which parliamentary commissions have three times in the era of Italy’s decline tried and failed to simplify and focus.

Official English translation of the constitution.

Italy’s constitution guarantees many wondrous things. Readers of this blog will not be surprised that my personal favourites are:

Art. 10

The Italian legal system conforms to the generally recognised principles of international law.

Art. 54

Those citizens to whom public functions are entrusted have the duty to fulfil such functions with discipline and honour.

Art. 111

The law provides for the reasonable duration of trials.

Banking the Sopranos

August 2, 2011













For some time I have been meaning to take a look at the structure of Italy’s public debt, and finally I did it. Let me assure you that the picture is every bit as ugly as one could imagine. I don’t mean the scale of the debt, which is known to almost every one. I mean the fact that Johnny Foreigner is totally, utterly on the hook. If this family goes down, we go down with them.

For the record, Italian public debt is currently around 124 percent of gross domestic product. Historically, this debt is the product of large, recurrent government deficits beginning in the 1970s. Over time, the debt load was compounded by the legendary ‘cunning’ (known in some cultures as ‘childishness’) of Italian politicians, manifested in manoeuvres like racking up the highest pension liabilities as a share of GDP in Europe — because it falls to another government, down the line, to pay the bill. So vote buying of one kind or another and a general willingness to mortgage the country’s future produced a large public sector liability.

Next, because of Italy’s history of relatively high inflation, governments were only able to sell their debt by offering short maturities. The buyers of Italian bonds commonly insisted on stuff of less than three years’ maturity. As of this year, Italy has about Euro500 billion of debt — around one-third of GDP — coming due in the next 36 months, compared with the equivalent of less than one-fifth of GDP coming due in that period in Spain. Even Greece has a lower share of GDP coming due in the next three years than Italy. (See the charts below. Note that these data are already a year out of date — they are the most recent I could quickly obtain. As each of the countries rolls more debt over into future liabilities, the bars to the right will rise quickly…)

Before one freaks out about these numbers, you have to remember that debt is really an issue of capacity to pay. Greece has no capacity to pay, which is why the market has already written it off. Until recently, the market said Spain had less capacity to pay than Italy. But now Mr Market is re-thinking.

There is good reason to do so. Spain has an Anglo-Saxon problem. Its banks are bust because of excessive real estate lending — a private-sector debt problem. The solution, sooner or later, will be bank nationalisation followed by a fattening of bank spreads in a less competitive banking system. The raising of the spread between deposit and loan rates quietly socialises the cost of the bail-out without a full-scale political confrontation about who is responsible for the cock-up and who must pay (the people my Etonian banker friend calls ‘the great unwashed’). This is what is already happening in the US and UK. Real estate prices deflate and banks use fat margins on current business to offset losses on their historic mortgage books. It is a long and painful process, but ultimately the mechanism to pay for the banks’ greed and misadventure is relatively easy to put in place.

Italy is a different story. Its debt problem does not stem from a real estate bubble and banking excess. The banking system already restrains competition and banks have traditionally made good margin from lending conservatively. The problem of the Italian banks is instead that — partly as a quid pro quo for a protected, high-margin banking sector — they have been the domestic buyer of first resort of government debt. Domestic financial institutions hold the overwhelming majority of Italian-owned Italian government debt. Put another way, government has been bribing the population to acquiesces in its incompetence and inefficiency, and the banks have provided the funds to allow this to happen. It is a public debt problem, but the banks are are the private sector symptom of it. This is why the shares of Italian banks are getting hammered as the debt crisis deepens.

If you want a non-technical Italian analogy, the situation is as if Paulie Gualtieri had started a bank. The main business of Paulie’s bank is lending money to Tony Soprano so that Tony can buy Porsche Cayennes for Carmela, which keeps their troubled marriage from falling apart. This is a pragmatic arrangement, and Paulie and Tony regard it as very cunning. Of course, Paulie’s bank eventually runs into trouble. When this happens, there is no automatic mechanism to socialise the losses. Instead, Paulie and Tony have to go out on the street and raise new funds by ‘cracking heads’.

Unfortunately, this is where the analogy breaks down. Silvio Berlusconi may be hewn from the same moral block as Paulie Gualtieri and Tony Soprano, but he does not have the same resources in terms of soldiers on the street. Washed and unwashed alike lack ‘respect’ for Sil and his degraded lifestyle (some of them hark back to the days of the legendary capo Bennie Muss, but that ship has sailed…).   Sil’s ‘family’ has been paring expenditure for several years since the global financial crisis broke. But his real problem is that the Italian economy has expanded an average of only 0.2 per cent a year since 2001. And the latest industry surveys suggest the economy is perilously close to contraction this year.

Put simply, there may not be enough money on the street for Sil to shake down, even if he had the wherewithall to do it. Mr Market knows this, and has pushed the price of Italian debt due for roll-over to more than 6 percent. When Greece, Ireland and Portugal exceeded a  7 percent cost of new debt, their bonds started to be sold off so heavily — because people no longer believed that they could be repaid — that bail-outs became inevitable. Italy may entering that arena and the symptom, as mentioned, is that Italian bank stocks are in precipitous decline. (Some of the more obvious investment advice today is: Short. European. Financial. Stocks.)

At this point, I know what you are thinking: the Sopranos had this coming. They’ve been taking the piss for years and, frankly, we’ve got bigger problems of our own to worry about.

Except that I am not sure that we do have bigger problems to worry about…

It is true that Italian banks hold most of the domestic share of Italian public debt. (Ordinary Italians have been far too sensible to load up on this toxic dross, despite any number of government schemes — mostly tax breaks — to encourage them to do so. The public holds only about 15 percent of Italian debt.)

However, apart from that held by Italian financial institutions, there is another vast chunk of Italian state bonds held by a different mob of wholly amoral financiers — foreign banks. Get this: approximately 900 billion euros of Soprano paper has been sold to foreign institutions, most of which represent a liability — if they go bust — to north European taxpayers.

Nine hundred billion euros is not some Greek, Irish or Portuguese morning after; it is a colossal, gob-smacking liability that means the Sopranos can probably make the rest of Europe jump through whatever hoops of fire they fancy. The line that Tony once used on Carmela is the one that Sil will likely use on the ECB: ‘Who knows more about extortion, me or you?’















Take a look at the aggregate numbers, displayed on top of the bars below, comparing debt due for roll over in Italy versus Spain….   (Greece, further down, is like discovering your kids failed to pay for half a dozen ice creams.)

2009 2011        
Japan 218.6 231.9 245.6
Italy 115.1 123.5 128.5
Greece 113.4 126.8
Belgium 97.9 104.9
United States 84.8 97.7 108.2
France 77.4 86.6 92.6
United Kingdom 72.9 89.3 98.3
Germany 72.5 87.8 89.3
Ireland 64.5 87.9
Spain 55.2 66.9
Sources: European Commission, IMF, OECD.

Don’t let Japan, in the table above showing public debt as a share of GDP, make you feel better about Italy. Japan is a qualitatively different story because almost all its ridiculously large debt is financed by domestic borrowing. Indeed the willingness of the Japanese to pay for the debt at close to zero interest is what allows it to be so big. Italy, by contrast, plans to have its debt and then have foreigners pay for it. (The last column in the table above represents forecasts for 2014… for some reason the date will not reproduce.)

The thought to keep me awake at night:

In order to get out of jail, one Carnegie Endowment economist reckons Italy needs to achieve a primary budget balance (before interest payments) of PLUS-4 percent of GDP and cut real wages by at least six percent (to restore some competitiveness). Is this likely? After Italy joined the Euro in 1999, its borrowing costs were cut from a peak of 10 percent of government revenue before the Euro to under 5 percent because Italy was temporarily afforded German interest rates. This provided an extraordinary one-off opportunity to reduce public borrowing. What happened? Over the next 10 years, Greece cut public borrowing by more than Italy.

Also worth a look:

This recent European Commission study shows that, from 1998 to 2008, exports of goods and services grew more slowly in Italy than in any other member country.

I post this, log on to the FT, and discover this is the lead story (subscription needed).

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