Italian financial problems ?

06/20/2011 - 16:14

Should this be a concern to us here in Italy ? Shares in Italy's banks fell sharply after Moody's threatened to cut the country's sovereign debt rating, saying structural weaknesses such as a rigid labour market pose a challenge to growth, and that higher rates may derail its economic recovery. S

Comment

There are three main credit rating agencies. Standard & Poors, Moodys and Fitch. Moodys rating at Aa2 is two notches above S&P's rating (A+). The markets at the moment are reacting very nervously to the least bit of negative news but ultimately Moodys are playing catch-up. If S&P were to cut (and their rating is on negative) this would be more worrying. Sometimes it helps to think of a country's credit strength in terms of a personal mortgage. You borrow a lump sum and have to make an agreed payment each month. Italy's payments are easily affordable at the moment (less in % terms of income than France) but Italy has the second biggest mortgage in the eurozone. (No surprise there). Greece, Ireland, Portugal, well they couldn't afford their mortgage payments and found that they could'nt remortgage any further so they had to have their parents bail them out. The UK's mortgage payments in percentage terms of income are currently four times that of Italy. Its only really that the UK didn't have that big a mortgage to start with, thats its been able to increase its borrowings so much. If Greece is forced out of the euro, then maybe haircuts could be in the region of 50-60%. That is, for someone who's currency base is not the "new drahma" then the value of their assets would fall (overnight) by 50%. Think houses etc. The big fear is that a Greek default could see a contagian effect throughout Europe with Ireland, Portugal and Spain following suit. Is Italy the "maginot line"? Personally I think it is but it was circumvented in WW2. But the real fear is that contagian would lead to a massive recession/depression throughout Europe. On its own a Greek default probably does not have too big an affect but the impact on the supply of credit for the rest of Europe is a big unknown.

Its not so much the debt to GDP as the ability to pay it. The Italian economy is stagnating at best. Edward Hugh who writes a brilliant economic blog puts it in a nutshell here : http://www.creditwritedowns.com/2011/05/italy-sovereign-debt-crisis.html ".....the financial markets have only been thinking of how comparatively low the Italian deficit has been since the start of the crisis, rather than worrying their heads off about how a country with such a low growth rate and such a high pending elderly dependency ratio is ever going to pay down the already accumulated debt. Italy’s debt to GDP ratio is currently just short of 120%, while the population median age is 45. So let's just say Italy is Japan without the current account surplus." It's fairly certain that if Greece defaults, creditors will be extremely nervous about other high debt slow growth nations and whether their dosh is safe. One way or another i cant see them not restructuring, reprofiling Greek debt because it seems the least worst option politically to ignore the fundamental and seemingly intractable eurozone problems and instead continue to kick the can down the street ......but yes contagion is a real threat both financially from the bond markets but also socially throughout Southern Europe .....+40% youth unemployment Spain and Greece.......its a real mess and very difficult to see how it will all be played out regardless of whether the ECB/IMF stick a temporary bandaid on Greece or not. As for the rating agencys.......fat lot of good they were!

The only countries which have had lower growth than Italy over the last ten years are Zinbabwe and Haiti - not alot to write home about. I disagree with Capo Boi on the scale of the fallout if Greece were to disappear from the eurozone - at least fiscally there would be a huge sigh of relief, politically it would be like the Night of the Long Knives - and I suppose in theory Europe (as a single union) could teeter, but realistically GErmany and France are Europe and they will do what they like while the rest of us tag along. Italy has a humungous national debt that Berlusconi has done nothing about, and never would - its too amorphous a concept for Italian voters who want results tomorrow. Italy is now at the point that the UK reached in 79, and while I would never wish a second Margaret Thatcher on anyone, someone has to do the dirty work and tell the Italians that an old style manufacturing economy is now worth zilch, work and homes are not a constitutional right, and that the Unions need to get out of their 1960s mindset and accept that the world has changed. If they dont do this sharpish then Italy is well and truly stuffed and will follow the other countries down the euro plughole. And I speak as a leftie!

As you have said, the Greek crisis is having a huge impact on other EU economies. Yesterday, Spanish stocks also lost a bit of value, particularly the banks. Until the Greeks agree to the harsh economic measures impose and France and Germany give the green light for assistance, we are going to see quite a lot of problems everywhere. Unemployment is still too high in some countries. Here, in Spain where I reside most of the time, we are currently having 20% unemployment and, as pianopiano says, youth unemployment is 40%, and this is a recipe for disaster. Italy also has a huge problem with youth unemployment, particularly graduates. I think that strong measures are going to be required.

France and Germany stand to take huge losses if Greece defaults - substantially more than any other country. It does smack of protectionism on their part. Will the Greek people stand for more cuts/austerity and being humiliated by the EU? I think a big risk is civil unrest in Greece. Remember it was a military junta just in the 80's. Surely for the Greeks it must be better to default, go back to the Drachma and start again. The thing I wonder is if this were to happen, would Italy be tempted to do the same? It would give them the ability to devalue the Lira again. This could take some of the pressure off their debt and mean they could continue not dealing with the problems in the Italian economy. It must be tempting to some politicians but of course they would not want to go first! I have to disagree with RAM that manufacturing is one of Italy's weaknesses. I think it is actually one of their strengths. Certainly Marche's economy is based on small, family-owned manufacturing companies and is not doing too badly for a recession. IMHO the major problems here are: 1. The tiny birthrate (not surprising given the fact maternity pay is not paid whilst you are on leave and the costs of anything for babies or children - at least 50%-100% dearer than in the UK). Italians are not even reproducing at replacement rate. 2. The ridiculous tax system that is so complicated and regimented (i.e. you can be an artigianale but that means you can't be a commerciante. In our case we could rent bikes (commerciante) but not charge to repair them (artigianale))! Who cares what you do so long as you pay your taxes and don't break the law? All these rules date back to the not too distant past when you had to have a licence to operate a business and only so many licences were granted for each 'trade'. Thankfully that was abolished. 3. Jobs are not awarded on merit but on the basis of who you know. This is a major problem. Italy's economy will never thrive whilst it is encouraging a brain drain of the most talented. 4. The short-term contract. Introduced to make the labour market more flexible (good thing) but now used by employers as a way of never giving a permanent contract. So few young people have a permanent contract. Without it they cannot get a mortgage so are completely stuck. Either the banks have to change their criteria (in my experiences with them highly unlikely) or this area really needs to be looked at. It has had probably unforseen damaging consequences. I don't believe that the structure of the economy (ie what is produced) has to fundamentally change but the working practices and priorities do. There is too much short-termism in Italian policies and politics. But then maybe that is a symptom of the generally short-term nature of Italian governments. Gala - do you think there is public support for Spain withdrawing from the Euro?

I'm frustrated that no half respectable economic commentator has attempted to explain what the results of any country leaving the Euro would be - for that country or the Eurozone as a whole. All that anybody has said is that 'it is unthinkable' or that 'they fear for the future'. Not very helpful. In my heart I do think that the lenders to Greece should take their haircut. Money is lent at diffferent interest rates to cover perceived risk. Some investors (pension funds etc.) are often only allowed to make investmens which are perceived as sufficiently 'low risk'. It is the ratings agencies which publish these judgements, but I think that the institutions which have lent money to 'adequately' rated (countries) still had a responsibility to look at the writing on the wall. (Just as they shouldn't have done the TARP). However, if a haircut restructuring is cobbled together, today Fitch have said, basically, whatever you (ECB, Europe) do, we'll call it a default. The default scenario triggers off all sorts of financial horrors. It does seem clear to me that the Euro common currency simply isn't working, and that the inability to devalue their own national currency is at the heart of the Greek difficulties. It was a useful mechanism, devaluation, just as inflation was a handy tool to have to hand. It seems to me there are two quite distinct problems in the financial sphere. Irrational lending followed by denial of responsibility and socialisation of debt: and an unworkable single currency in Europe. The first problem can be considered to have been engineered by the likes of Moody's et al, but the second was simply an honourable experiment which has failed. Maybe as a first step Germany should leave the Euro, and the Scandinavians shuld unhook their currencies from the fixed rate.

Penny, I do not think that Spaniards would go as far as wanting to go back to Pesetas. There was a lot of people against the introduction of the Euro as currency and quite a few people still think in Pesetas; however, I do not think that they would be in favour of another change. Prices have already gone up when the Euro was introduced and I think that many would feel that another change will only bring more chaos. Another point that is very prevalent in both Italy's and Spain's economy is the fact that there is a lot of black money going around. Many people do not declare work earnings or wealth or they underdeclare them. I heard that there is a similar problem in Greece. And a major problem is the high percentage of people employed by the public service... I do not think that the Euro is to be blamed (sorry, Fillide). I think that the individual countries are to be blamed for the way they handle the economy.

I agree with you Penny, in as much as the small family industries are the backbone of italian business, but they are hugely penalised by the govt. What I was referring to was the Finmeccanica side of italy - huge, lumbering 'state' firms - shipyards, and so on - all the stuff that died a death in the 80s in the UK - in favour of a service economy. Nobody has the guts to offer an alternative, or accept that its days are numbered, it is impossible to be competitive in the face of the emerging economies. So either they will retain govt contracts leading to huge overspends and criminal waste, or they will go to the wall - with no safety net for the poor sods who work there.

I agree that leaving the Euro is not an option for most EU countries now, as personally I don't think it will help. What need to be addressed is the Banking system that allows Countries to 'borrow' at these high rates with little or no chance of paying back, which escalates the problem. It seems to me that every Government runs away from confronting 'The Banks' as they react with the treat to relocate to another Country (as Barclays did with the UK a year or two ago); unless collectively the EU stands firm and regulates the banking system (addressing the bonus fiasco) then Banking will continue to regulate itself and only lend on it's terms. Next time Governments should put stricter enforceable conditions on Banks when a crisis looms and they beg cap in hand for financial backing or going to the wall.

Its really interesting. In the last 48 hours, Greek bonds have recovered by 7%. Would'nt like to be short BTP's. Sterling at €1.05 is a real possibility now.