Summary: The strong often believe that the weak have no choice but to stay in the game (however rigged) and accept whatever cards they’re dealt. While logical, the weak often have the ability to turn the tables. So it is with creditor nations, who often confuse the power of loans with that of tanks — and confuse the morality of the Beatitudes with the claims of a promissory note.
Trouble rather the Tiger in his Lair than the sage among his books. For to you Kingdoms and their armies are things mighty and enduring, but to him they are but the things of the Moment, to be overturned with the turning of a page.
— Ancient wisdom, source unknown — it applies even more to loans than armies
Creditors often assume that they have both worldly power and moral superiority over their debtors. Only God can judge the latter, but history suggests that the former is wrong. Nations that accumulate large debts are locked in a system of trade imbalances which make them as or more vulnerable than their debtors.
- The US was a large creditor in 1929, and fell harder than most during the Great Depression.
- Japan was the world’s top creditor in 1989, and still has not recovered from the following bust.
Now it’s Germany’s turn. They prospered from exports to the PIIGS which it financed with loans. Now they expect the PIIGS to suffer depressions in order to repay the loans, threatening expulsion from the euro-zone to any who default. The consequences of that are unknowable, but certainly traumatic.
But fear of the unknown might not deter one or more of the PIIGS, as default and devaluation may provide a new start — and be the best path to the future. Here we look at Italy. We cannot predict what they will do; we cannot see beyond choices the people of Italy have not yet made.
Contents
- Italy is bust
- A more detailed analysis, same conclusion
- Barclay’s runs the numbers, gets the same answer
- Roubini asks if Italy wants to stay with the Euro?
- For more information
(1) Italy is bust
“Italy is bust; it’s just a question of when“, Matthew Lynn, MarketWatch, 8 November 2011 — “Italy has a lot of debt and a lifeless economy … and faces three big problems.”
- While government debt may have been fairly stable over the last decade — admittedly at fairly high levels — just about every other type of debt has exploded.
- Italy has stopped growing. It has been through 4 recessions since it joined the euro in 1999. Average growth has been just 0.6% from 2000-2010. Per capita GDP growth has been 0.1% over the whole of the first decade of the single currency {while} the global economy was booming …
- Italy has the worst demographics in the world. The UN projects that the population will fall to 41 million by 2050 from its current 51 million. Even worse … life expectancy is rising fast. Italian women now have the longest life expectancy in Europe at 83.2 years, and the men are not far behind.
The statistics about the debt load of Italy (and other developed nations) come from “The real effects of debt“, September 2011. See the tables on pp 24-26; you’ll probably find them full of surprises.
(2) A more detailed analysis, same conclusion
“Italy: Too Little, Too Late“, Katharina Jungen et al, Roubini Global Economics, 10 November 2011 — Subscription only. Summary:
- Italian debt dynamics have become unsustainable in light of much-weaker-than-expected growth prospects and elevated borrowing costs. Following a sharp loss in market confidence and a buyers’ strike, we expect Italy will be forced to restructure its sovereign debt.
- The environment of heightened political uncertainty in Italy has rendered it incapable of tackling the current challenges. The size of the financial assistance needed to support Italy coupled with the inadequacy of the eurozone’s rescue strategy is likely to force the country into a managed debt restructuring as early as 2012.
(3) Barclay’s runs the numbers, gets the same answer
“Can Italy save itself?“, Michael Gavin, Barclay’s Capital, 7 November 2011 — Summary:
- The ongoing debt crisis in Greece is a legitimate concern for policymakers and investors, but growing concerns about Italy pose the real danger to Europe and the world economy. Yields on Italian government debt have reached new highs, and are at levels that we consider clearly unsustainable.
- We believe that policy reforms in Italy are necessary to increase confidence in the Italian credit. However, historical experience suggests that the self-reinforcing negative market dynamics that now threaten Italy are very difficult to break. At this point, Italy may be beyond the point of no return.
- While reform may be necessary, we doubt that Italian economic reforms alone will be sufficient to rehabilitate the Italian credit and eliminate the possibility of a debilitating confidence crisis that could overwhelm the positive effects of a reform agenda, however well conceived and implemented.
- … We see little practical alternative to a strengthened commitment by the ECB to act as lender of last resort to precariously positioned eurozone governments.
(4) Roubini asks if Italy wants to stay with the Euro?
“Eurozone Crisis: Here Are the Options, Now Choose“, Nouriel Roubini, Roubini Global Economics, 9 November 2011 — Excerpt (red emphasis added):
Cost of Euro-zone Membership May Eventually Outweigh Benefits, Thus Triggering Exit
Also, the alleged benefits of remaining in the EZ may now be less convincing for most periphery members: Initially, the EZ led to interest rate convergence when market discipline was not operational; this was a significant benefit as nominal and real interest rates were low and falling and making the cost of debt for both private and public sectors low. Now, with market discipline in full swing and sovereign spreads high and rising, this major benefit of the monetary union has disappeared and has rather become a major cost/burden.
Worse, remaining in the EZ implies ceding from now on a significant part of — if not all — fiscal autonomy to the core: Soon enough, the troika will decide most of the taxation and government spending in the periphery, including social safety nets, social security systems and the matters and details of the privatization of public assets. Germany/the core may also effectively take over part of the periphery’s financial systems if the only way to recapitalize periphery banks is by using EFSF resources. Also, the ECB’s monetary and exchange rate policies have now clearly gained — after over a decade of experience — an anti-growth and an anti-competitiveness bias, focusing instead on the strict achievement of price stability.
When national currencies existed, rising differentials in competitiveness — because of differentials in unit labor costs —could from time to time be remedied through nominal and real depreciation of national currencies. Now, that benefit is gone and only recessionary deflation is available.
So, what are the alleged benefits of staying in the monetary union if the costs seem to be rising while the benefits are shrinking? Periphery members are still blinded by the potential stigma of an embarrassing exit, especially policy makers who would lose power if a shameful exit that suggests failure were to occur. So, they are desperately avoiding even the thought of exit rather than seriously and rationally considering its benefits as well as its considerable — but manageable — costs. But populations will not meekly accept year after year of sacrifices, job losses, rising unemployment and hopelessness about an economic recovery. If there is no light at the end of the tunnel or the only light is from the approaching train wreck of a deflationary recession with no hope of a short-term recovery, debt reductions and exits from the monetary union will become necessary, desirable and unavoidable.
(5) Update: A look at Italy, now and in the past
“Italy: not good but we have seen this before“, Antonio Patas and Ilian Mihov, 14 November 2011 — Excellent graphs! Opening:
It is hard to find much optimism by looking at the Italian economy today: Low growth, high government debt, limited confidence of financial markets and no government. Pick a random newspaper or economics blog today and the tone will be on a range from mildly pessimistic to catastrophic. I will not repeat their arguments and instead I will do my best to be a contrarian and argue that maybe it is not as bad as it looks. Or maybe it is, but Italy has managed to live with such a bad situation for years so there is some hope. This might not be enough to turn you into an optimistic but at least it provides a perspective to how similar episodes ended.
(6) For More Information
Other articles about the euro-crisis:
- “Decision time for monetary union“, Pictet & CIE
- “The Italian Job“, Gavyn Davies, Finanical Times, 13 November 2011
- “Breaking Up the Eurozone Is Hard but Not Impossible“, David Smith (Economics Editor of London’s Sunday Times), 13 November 2011
Other posts about the crisis of Europe:
- The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
- Can the European Monetary Union survive the next recession?, 11 July 2008
- The periphery of Europe – a flashpoint to the global economy, 8 February 2010
- A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
- Governments cannot go bankrupt, 2 April 2010
- Our government’s finances are broken. How do we compare with our peers?, 8 April 2010
- The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
- About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
- Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
- The Fate of Europe, nearing the point of decision, 13 September 2011
- Europe drifts towards the brink of a cataclysm, 26 September 2011
- Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
- Every day the new world emerges, yet we see it not. Like today, as Europe begs China for loans, 15 September 2011
- Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
- We see the outlines of the next cure for Europe. Will it work?, 14 October 2011
- Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
- Where to from here, Europe? Some experts share their views., 8 November 2011
- Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
- Europe begins its endgame. Nobody knows the outcome., 11 November 2011
Honorable Maximus. Excellent as always. Very informative. Especially the info that Italian growth was only 0.6% in ten years! How can they pay any debt back whatsoever? Unbelieveable.
Germany and France expect Italy and Greece to wring themselves dry to repay their creditors. Squeeze the workers, into a depression if necessary — in the holy cause of repaying their debts.
The consider themselves the supreme authority because they run the EU. Hence acting as bankruptcy court, but one unwilling to show mercy and eliminate excessive debts. If they exert too much pressure, Italy and Greece might remember that they retain their sovereignty. And can default, even reclaim their right to issue their own currency.
You think the Euro will stay intact if Italy pulls out?
It’s difficult to say how this will work out. My guess is that the northern European nations will remain in a currency union, perhaps with some others. The advantages are too large to abandon.
A secondary guess is that they will continue to call this the “euro”.
Three points
1) I recently read a quote to the effect that Calabria, the region at Italy’s toe, which is home of and is dominated by the ‘Ndrangheta, an organized crime faction, already would be classified as a failed state if it were an independent entity.
2)The Cafe’ de Paris, the Roman restaurant which played a major role in Fellini’s La Dolce Vita, recently was busted as a front for the Italian mob.
3) During the recent economic downturn, loan sharks were the primary source of financing for Italy’s small businesses.
QED: Expect more of this sort of thing.
(1). I would like to see actual data on that, rather than a casual and probably imprecise (aka wrong) statement by somebody in the news media. Also, some US inner city areas easily qualify as failed states, in the sense.
(2). I once lived in a building that contained a front for a US organized crime group (they make scary landlords). Nor was it the only such in the USA.
(3). Again, data rather than scary stories would be nice. At some point the accounts in the media becomes myths, like commie (now al Qeada) sleeper cell in my cousin’s neighborhood.
In my mind these are the two processes that can turn a crisis into a disaster. (A crisis is running out of gas, a disaster is running off of a cliff)
1) The EU’s leadership attempts to tie membership in the EU’s trade, legal, subsidy and standards regime to membership in the common currency. In effect rather than realize the Euro is no longer working for some EU countries, and then work out how to gracefully let the Eurozone shrink or adjust their policies, they double down on it and try to force countries to choose between EU membership and solvency.
2) A conflict between the interests of the national elites and individual states leads to political instability within EU member states. If you’re wealthy, the prospect of internal devaluation and an ECB committed to holding the line on inflation is actually fairly attractive. Your purchasing power goes up, and you’re unlikely to feel the effects of the downturn. If you’re not wealthy, you get to see a sharp decline in your standard of living. The elites are unlikely to see any problem with austerity measures until there’s rioting in the streets. And even then, only if they’re big enough riots.
The first if it happens risks damaging the basis of the EU, the second risks damaging the basis of democratic government in the EU member states.
I can’t believe that if Iceland can survive with little impact on their people by not taking on their banks debt, why Italy or Greece won’t attempt the same. Those that bought the debt of these countries, should suffer the consequences of their stupidity.
Even war isn’t even a good choice to make them pay. After wars, most winners write off the losers debt and move on. I prefer an Iceland senario and smarter bankers!
Behind all of this lending are the crony capitalists, and the belief that the lenders will be bailed out by the Government/people if necessary, and the cycle can continue. There are winners in stupid lending.
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