Italy’s
Day of Reckoning Is Coming
John Mauldin
Italy
has a new government, and Matteo Renzi is not in charge of it. The former prime
minister kept his word and resigned following his constitutional reform plan’s
crushing defeat at the polls. Is all now well in that beautiful land?
Not
exactly, though we did see a glimmer of hope this week. Unicredit, Italy’s
largest bank, announced job cuts and asset sales that may buy it some time.
This does not, however, mean the crisis is over. At best, it means the
beginning of the crisis is over. We have a long way to go.
With
those cheery thoughts, we turn next to the Telegraph’s
Ambrose Evans-Pritchard. He profiles a Milanese professor named Claudio Borghi,
who may well become the finance minister who takes Italy out of the eurozone.
Professor
Borghi is doing the ugly but necessary work of defining exactly how Italy can
restore its own currency. He would begin by launching a kind of parallel
currency alongside the euro.
“The Italian treasury has €90 billion (£76
billion) in arrears on contracts. These could be paid with treasury bonds
issued for as little as €50, €20, €10, or even €5, giving us time to create a
second currency.
“When the time comes we can then switch to this
new currency. It can be done electronically. We don’t even need to print
paper,” he said.
Prof Borghi said the cleanest option is for
Germany to leave the eurozone. If that is impossible Italy can pass a law to
convert its debt obligations into lira overnight – or the ‘florin’ as he
prefers to call it, harking back to the days of Florentine ascendancy under the
Medici.
“The losses would shift to the national central
banks through the Target2 system,” he said. This means the Bank of Italy would
repay €355bn on liabilities to eurozone peers (chiefly the Bundesbank) in
devalued lira. The Bundesbank would face instant paper losses on its credits –
effecting €700bn in the likely event that an Italian exit would lead to a
general return to sovereign currencies.
I
can only imagine the frowns in Berlin upon seeing the line, “the cleanest
option is for Germany to leave the eurozone.” It may well be true, but it’s
hard to imagine any German government agreeing to do so.
Münchau
and Evans-Pritchard are two of the leading economic commentators in Europe. If
they’re this worried about Italy, we should be, too. The first 90 days of the
Trump administration will be important to the near-term fate of the US economy,
but Italy could be more crucial. Italy is a ticking bomb.
I’m
writing this on a plane from New York to Atlanta. I’ll be home in a couple
days, but then I have to turn right around and head back to DC, where we’re
planning an event for the inauguration. I may have more to say on that in this
weekend’s Thoughts from the
Frontline. Meanwhile my shadow complains that it’s having trouble
keeping up with me!
Before
I go, I don't normally mention hotels, but the Melrose Hotel in DC (Georgetown)
is a true gem. A boutique that is rated best value and #2 by Conde Nast, and
even though not expensive, it was first-class with great individual touches.
The restaurant was superb and surprisingly not crowded on a Saturday. Try the
sole or pork. My new DC home.
Your
thinking of Tuscany analyst,
John Mauldin, Editor
Outside the Box
Italy’s rebel economist hones plan to ditch the
euro and restore the Medici florin
By Ambrose Evans-Pritchard
The once-unlikely and remote prospect of an
anti-euro government in Italy is suddenly becoming a real possibility,
threatening to rock the European Union to its foundations within weeks.
Events in Italy are moving with lightning speed.
Key figures in the Democrat Party of premier Matteo Renzi have joined the
chorus of calls for snap elections as soon as February to prevent the
triumphant Five Star Movement running away with the political initiative after
their victory in the referendum over the weekend.
Mr Renzi has not yet revealed his hand but close advisers say he is
tempted to gamble everything on a quick vote, betting that he still has enough
support to squeak ahead in a contest split multiple ways and that his opponents
are not ready for the trials of an election.
It could easily spin out of his control, opening a
way for a tactical alliance of Five Star, the Lega Nord, and a smattering of
small groups, all critics of the euro in various ways.
The man tipped as possible finance minister of any
rebel constellation is Claudio Borghi, a former broker for Merrill Lynch and
Deutsche Bank, and now a professor at the Catholic University of Milan.
“We are coming to the point where Italy must the
make the real decision: are we for Europe or are we against it?” he told the
Telegraph.
“What is emerging is a list of four parties or
groups who all have one thing in common. We all agree that nothing is possible
until we leave the euro.”
“Europe has brought us a depression worse than
1929. It has led to entire peoples being broken and humiliated, like the
Greeks, all for the sake of preserving the infernal instrument of the euro.
This whole disaster has been adorned by a chain of lies, shouted ever louder
because they are afraid that the colossal damage they have done will be
discovered,” he said.
Dr Borghi said the landslide 59:41 result in the
referendum is a shock to Italy’s powerful vested interests, or “poteri forti”.
“They are absolutely scared because none of their tools of control are working
any more,” he said.
“They invested huge prestige in the campaign.
Confindustria [Italy’s CBI], the chambers of commerce, and all of Italy’s big
employers were for the ‘Yes’ side. They said the banks would collapse, that we
would lose all our savings, and that we would all go to Hell if we voted ‘No’,
but it didn’t work. It was Brexit reloaded,” he said.
Professor Borghi said withdrawal from the euro
would be messy but there are ways of mitigating the effects, first by creating
parallel liquidity and letting it seep into daily life.
“The Italian treasury has €90 billion (£76
billion) in arrears on contracts. These could be paid with treasury bonds
issued for as little as €50, €20, €10, or even €5, giving us time to create a
second currency.
“When the time comes we can then switch to this
new currency. It can be done electronically. We don’t even need to print
paper,” he said.
Prof Borghi said the cleanest option is for
Germany to leave the eurozone. If that is impossible Italy can pass a law to
convert its debt obligations into lira overnight – or the ‘florin’ as he
prefers to call it, harking back to the days of Florentine ascendancy under the
Medici.
“The losses would shift to the national central banks
through the Target2 system,” he said. This means the Bank of Italy would repay
€355bn on liabilities to eurozone peers (chiefly the Bundesbank) in devalued
lira. The Bundesbank would face instant paper losses on its credits –
effecting €700bn in the likely event that an Italian exit would lead to a
general return to sovereign currencies.
The sums are in one sense an accounting fiction.
The trial run was the collapse of the Swiss franc peg against the euro in
January 2015. The Swiss National Bank suffered vast theoretical loses on its
holdings of eurozone debt when the franc revalued, but life went on regardless.
The gamble is that large sums held by Italians in
accounts in London, New York, Paris, or Munich, or held in safe-deposit boxes
in Switzerland, would flow back into the system as soon as the boil is lanced,
and once Italy has returned to exchange rate viability. Foreign investors would
view Italy as a far more competitive prospect.
“I don’t see any disaster. There is no way to
smash our currency since we have a trade surplus. If we had a weaker exchange
rate we would have an even bigger surplus,” he said.
For Italy’s eurosceptics a return to the lira
would be a liberation after fifteen years of economic decay that has hollowed
out the country’s manufacturing core. Industrial output has fallen back to the
levels of 1980. Real GDP per capita is down 13pc from its peak.
A report this week from the statistics agency
ISTAT said the numbers at risk from poverty and social exclusion last year rose
to 28.7pc, and a fresh high of 46.4pc in South, and 55pc in Sicily – the
epicentre of the ‘No’ vote in the referendum.
A study by Mediobanca found that Italy’s growth
rate tracked that Germany almost exactly for thirty years. The pattern changed
with the advent of the euro, which precluded devaluations and led to a slow but
fatal loss of labour competitiveness – like a lobster being boiled
alive.
This was compounded by the eurozone’s fiscal and
monetary contraction from 2010-2104, a policy error that caused the EMU debt
crisis and led to a double-dip recession. This is turn pushed Italy over the
edge and into a banking crisis.
Exit from the euro would give the country the
fiscal freedom to break out of its deflationary trap, and to save its
banking system with a state-led recapitalization along the lines of the TARP
programme in the US – forbidden under EU state aid laws, unless Italy agrees to
swallow the draconian terms of an EU bail-out.
Prof Borghi said the EU’s new ‘bail-in’ rules must
be swept aside. “As soon you start wiping out savers and bondholders – who did
not behave recklessly – you are telling people that their money is not safe in
the bank,” he said.
“All the EU has achieved is a collapse in Italian
banking stocks by 85pc since last November. You have to step in to save the
banking system in a crisis otherwise everything is destroyed,” he said.
Prof Borghi is chief economic strategist for the
Right-wing Lega Nord, but what is emerging is a tactical alliance between his
party and the Five Star Movement, which has more in common with the Left. The
two together are running at 44pc in the polls. Their economists are working
together in what is becoming a closely-knit school of eurosceptics.
The grass roots of the Five Star party have always
been hostile to pacts with any other group, regarding the whole political cast
in Italy as rotten to the core. But Mr Grillo says the party is closing in on
power and must be prepared to make compromises. “We are in a spiral towards
government,” he said.
Prof Borghi is under no illusion that leaving the
euro can alone solve Italy’s deep-rooted problems, but ’Italexit’ is a
minimum condition. “It is going to be hard, but without our own
correctly-valued currency, we are not going to be able to do anything however
hard we try,” he said.
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