Monday, November 7, 2011

Greece's La Strada?

At this writing, US stocks were poised for a lower open on Monday as political turmoil in Italy sparked worry the euro zone debt crisis could overwhelm the region's third largest economy:

Benchmark Italian government bond yields rose to their highest since 1997 at 6.67 percent. Many analysts said yields above 7 percent would make funding costs unsustainable for Italy's huge public debt, one of the highest in the world.

Italian Prime Minister Silvio Berlusconi, under pressure from markets and rebels in his party, fought to hang on to power and denied reports he would resign within hours. Party rebels threatened to bring down his government in a backlash over its failure to adopt reforms to defuse a debt crisis.

"As soon as Greece looks like we can now sort of digest the risk right off the issues, in comes the 800-pound gorilla into the room. Italy is a much, much larger concern, with issues that have been lingering for decades," said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey.

"This is not something you can cordon off. Italy is central to the European zone and it is going to force the European Union to recalibrate everything that has been taken for granted thus far in the conversation."

Italy is indeed the 800-pound gorilla in the room. As a friend of mine put it: "Greece is a carcass. There is nothing left to pick at. Speculators are licking their chops and going after Italy now." Indeed, they are. Andreas Koutras sent me his latest comments on the Greek coalition government and how Italy's woes are Greece's nemesis. On Greece, he writes:

The current agreement by the two major parties to form a coalition or a national unity government resembles the weddings in Aliki’s (Vougiouklaki) films. As spectators we are elated at the happy ending but once outside the cinema reality strikes once more. Everyday problems have not disappeared, jobs have not being created, corruption and nepotism are alive and kicking and the feeling of injustice, helplessness and national humiliation persists. The really sad thing however, is that as in Aliki’s case, we seem not to have a choice. We have to vote for the same old politicians or their mutated heirs. As with Aliki’s films the best we could hope for was to go back and watch another one of her films with a happy ending. No matter what the people of Greece do or want, they see their political elite not just surviving but thriving at the expense of the country and its future.


For a second, no more than a second, I thought that the PASOK MP’s meant their defiant words after Papandreou’s referendum blunder. I was wrong. One after another, they minced their words and softened their “moral outrage”. The sole purpose was to save the endangered political system of which they are members of.

Both major parties have such a grip on their MP’s and the political arena that ordinary voters are pushed to the fringes of politics. It is exactly this sclerotic monopoly that allows the survival of fascist and Stalinist communist ideology in the Greek society. Neither PASOK nor ND, allow political evolution to take hold. Greece suffers from a political stasis. Democracy’s great advantage over most other political systems is its ability to evolve, change and adapt. And as we all know, a species (political or other) if it does not evolve and adapt to the changing environment becomes extinct. This is the fate of most immutable political systems (witness Gaddafi and other dictators). Greece’s political system however, is only called Democratic because we have elections. It should be clear by now that although this is a necessary condition it is by no means sufficient.

For this reason, I am very skeptical at the latest attempt of the political elite to save Greece. I am not entirely convinced that the National Unity Government (or whatever they wish to christen it) is there to effect any real change (other than ensuring the EU installment) and to avoid the path to oblivion.

And as far as Italy, Andreas writes:

The next chapter of the European debt crisis is slowly taking shape. Italy’s debt is by any standard astronomical. At 1900billion euros it dwarfs Greece’s 350billion or Spain’s 650billion. Italy of course is a much bigger economy, its GDP stands at around 1500billion and it has so far avoided the worse effects of a deep recession. This however, may be about to change. Italy’s deficit is around -4.6% and the aim of the MOU presented by Berlusconi last week to the European leaders is to annihilate it by 2014.

This would be a very hard target to achieve. Italy contrary to Greece has one of the highest tax burdens of all European countries. At 43.5% it is one of the highest n Eurozone (see table). If the Italian government attempts to follow the footsteps of the Greek government and raises taxes to fill the state coffers it would surely be met with increasing non-compliance and possibly social unrest. The Greek government on the other hand did have that choice but it really messed it up by failing to catch tax evasion and instead it concentrated on indirect taxes (Taliban tax raids). This reinforced the feelings of injustice amongst Greeks.

Thus in Italy’s case the only realistic option is to cut spending, to start selling state assets and to downsize the public sector. This is not a change that can be implemented with visible results any time soon or one that can be easily swallowed by the Italian public.

Italy has to refinance 166billion in 2012 (120 Principal, 46 Interest) and 160 billion in 2013 (117 Principal, 43 Interest). Not accessing the markets is not an option that the EU can afford.

But there is another point with regards to Greece. If the so-called contagion/metastasis materialises then saving Greece becomes irrelevant. No longer is Greece the first line of defence for Europe. Now the focus would be on Italy and Greece can be left to lick its wounds either in or outside the Eurozone. In other words the spill over of the debt crisis into Italy signifies also the total loss of all the trump cards that Mr. Papandreou and his government were playing. This is something that most Greek politicians have not realised. They still think that Europe cannot afford to let them go. With Italy in crisis, the EU would have to get serious and if it means sacrificing Greece so do it. Greece would become the Lehman Brothers instead of Bear Stearns.

I agree, Italy has always been the main concern and Greece a sideshow. That's why I scoff at all the news articles warning of a "Greek-style debt debacle." Greece is a fart in the wind, watch as Italy unravels and how that plays out in the next few weeks.

Italy has become Greece's La Strada. They are selling out Europe's weakest link to do some major damage control in Italy. But will it work or will the European crisis just get worse? That remains to be seen but Jim Rogers may be right, the Greek bailout plan is just pushing the debt crisis into the future, and could spark an end to the euro zone in five years (see interview below).

“Everybody is trying to get past the next election and it’s not going to end well at all,” Rogers says. “There are huge staggering numbers involved, but not just Greece – all over Europe and these guys just don’t seem to get it.” Indeed, they don't get it, which is why I fear that policy blunders will lead to the next global meltdown.

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