Posts Tagged ‘Silvio Berlusconi’

Shaggy dog

October 27, 2011

It’s another fudge from Europe. The European Financial Stability Fund has been ‘theoretically’ expanded through approved leverage to perhaps Euro1 trillion. Private holders of Greek bonds will ‘theoretically’ take a 50 percent hair-cut, though no details have really been agreed. Silvio Berlusconi has delivered a letter ripe with fulsome promises of structural reform in Italy, to add to lots of other fulsome promises he made before.

It was clear in recent days the markets were ready to accept some more thin European gruel as ‘good news’. Corporate earnings in the US continue to be strong and the latest US GDP figures suggest the American economy is slowly crawling away from the abyss. The very slow improvement in the US macro numbers is the bigger economic story, albeit less trumpeted in the press.

The European train wreck waiting to happen has been moved back down the line. But not far. In the absence of any substantive structural change in Italy, a train wreck there will be. The base case remains remains an Italian fiscal crisis and IMF intervention in the absence of any EU capacity to address the problem.

In the mean time, Italy’s negotiating position can only be strengthened by the ECB’s continued purchases of its debt (EU debt socialisation by the back door) and by the Greek debt hair-cut (What about us, another ‘young’,  ‘peripheral’ European state?). Time to write about something else for a while.

Next day update:

Porco cane! Rome auctions some debt this morning and the market still wants 6 percent (FT sub needed)… In fact the cost of Italian public debt has gone up to a new record. Is it possible that people outside the Italian elite are less stupid than they thought?

Un-modern family

October 24, 2011

You’ve got a big mummy who hasn’t aged that well but has cash. Your dad is a bit flash but somewhat light-weight and ineffectual. And you are still sponging off your parents despite the fact you are 75 years old.

Sound familiar? That’s right, it’s the Germany-France-Italy relationship.

The sight of Frau Merkel and Sarko-I-can-do-a-serious-face-too chastising Big Baby Silvio Berlusconi is like watching some super-sick sitcom that makes Modern Family seem like straight play.

Sil is going to have an emergency cabinet meeting (FT sub) to talk about really really really doing something to sort out Italy’s structural problems.

I am soooooooo excited.



Mum and Dad are questioned about Sil:

Here is the presser where a journalist asks in French if Mummy Merkel and Daddy Sarko find Sil’s promises about what he is going to do convincing. The facial expressions are priceless. There have been a couple of hundred thousand page views already.

Sunday bloody Wednesday

October 20, 2011

Italian debt yields are back over 6 percent. So France and Germany react by announcing that Sunday’s last-chance saloon summit on European debt and economic restructuring will go ahead, but won’t reach any decisions. Instead there might be another summit on Wednesday. Or Thursday. Or next weekend. Maybe Sarko and Merkel are hoping the markets will really fall apart so they can be seen to be forced to do something. This is the most likely endgame. But of course if they are forced by a market crisis, France and Germany will react with a bail-out package rather than a new political agreement that puts the EU on a sustainable track to being the world’s most desirable economic bloc to live in. That would involve a political and institutional agreement, not a conclave of thieving banker types trying to structure the EFSF in a sufficiently complex way that the world is conned into thinking that all is well.

While pondering this, I check the press at the end of the day and am saddened to discover that Berlusconi is dead. ‘Maverick dictator with little regard for reality’ says the headline of the obit in the FT (sub needed). It is a bit tough to say of a deceased G8 leader that he ‘had a grandiose vision of himself and of his country’s place in history’. None the less, Italians certainly ‘were impoverished and repressed by his policies but nonetheless forced to pay homage to the illusion that he was a political visionary’. However, surely the FT has got it wrong with the claim that Berlusconi was born in a tent near Sirte in 1942? Wasn’t he born in Milan in 1936?





The aberration angle

September 19, 2011

The Observer runs a long article  to coincide with the start of summing up in the appeal case of Sollecito and Knox in Perugia.

The expectation of an acquittal is now such that journalists are moving on to the ‘What it all means’ phase. And this story is probably a taste of what is to come.

An unnamed source is quoted:

‘According to one local journalist with decades of crime reporting experience, the descent of American and British reporters on Perugia in the days after the killing “put pressure on local investigators to go too fast”.’

Only in Italy could a journalist — a person whose work is public by nature — insist on being quoted as an unnamed source. It is the measure of the society, and the shallowness of its professionals. Of course it is also shocking (and I think unusual) that The Observer would allow a journalist to be quoted as an unnamed source.

The import of the remark, of course, is straightforward. This is an early example of the aberration argument. It infers that this miscarriage of justice was unusual, explicable by its uniqueness, and partly the fault of foreign journalists.

Were the jailings of the Birmingham Six, the Guildford Four or the Maguire Seven in the UK aberrations that resulted from journalistic pressure on police? Or did these cases — and many more that were not terrorist-related — reflect systemic failings in the police and criminal justice systems?

The passage and application of the Police and Criminal Evidence Act in the UK in 1984 is the answer to the question.

In Italy, there will be no gains from a monstrous miscarriage of justice. Instead, we are getting ready for face saving. The narrative of the professional class’s self-defence is under construction. It tells of a society incapable of self-improvement.

At the same time, inflaming those famous Italian tempers further, people around Berlusconi are suggesting that acquittal for Sollecito and Knox will prove that the police-judicial system is rotten to the core and therefore that cases against the premier are fabricated assaults. It is the little jump in logic that does not work. The system is a mess, but this is not reflected in the existence of cases against Berlusconi, it is reflected in the fact that justice is never done.

In northern Europe or the US Berlusconi would have been dealt with by the judicial system years ago. Here he gets to survive, with the only quid pro quo being that he must participate in the judicial circus. The latest gratuitous leaks and leaks from cases that have not been completed are surely a small price to pay for never actually having to pay for anything. Better still, the judiciary is a source of endless votes for Berlusconi, much of whose political support derives from popular frustration with Italy’s Third World legal system.

Just look at the state of…

September 11, 2011

The British middle class

A great story by Zoe Williams about the national education system, national education versus private education, and middle-class selfishness. For me, the ghettoised education system remains the thing to like least in Britain.

Premiership football

The tale of how footballer Wayne Bridge decided to stay at Manchester City on his £4.7 million salary even though the team is unlikely to give him first team football and he has been left out of the Champions League squad. Somehow the price mechanism doesn’t seem to be extracting peak performance from Wayne.

Continental Europe

Still, being here in the UK you get to look at certain other places in Europe and reflect that things could be so much worse.

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…


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).

Lawyers, by a mile

May 24, 2011

It is said that estate agents are worse, but at least the average estate agent has the moral (if not legal) defence that he or she is ignorant. Lawyers, by contrast, have all had the chance of a university education, and so will surely have more to answer for when they arrive in hell (presumably to be greeted at the door by a lawyer). The latest antics from Italy’s legal profession beggar belief, so utterly selfish are the lawyers in putting their personal interests ahead of society’s interest. This country really has become one whore-story after the next.

No other rich nation can hold a candle to Italy’s professional classes, but lest the British be accused in the Umbrian expression of beingmosche bianche (white flies), take note also of the British Director of Public Prosecutions’ performance this week. Keir Starmer should have decided to prosecute policeman Simon Harwood for manslaughter last July. He is now being forced to do so because of the outcome of a public inquest and makes the most pathetic attempt to construct an argument that the evidence produced in the inquest could not, or would not, have been brought out in a criminal trial. You know that a lawyer, like Starmer, is on the back foot when he starts using verbs like ‘adduced’. It is tantamount to saying: ‘Please take it for granted that I am very clever and doing the right thing, and not at all the stereotypical yes-man who is given this job.’

People like Louis Brandeis, Felix Frankfurter, or Gareth Peirce are the Halley’s comets of the legal profession. You are lucky to know one lawyer who cares about more than their new Audi and their holiday in the Maldives in a lifetime.

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