The Spotlight Now Shines on Italy

The spotlight has now fell on Italy as many in the Euro Zone struggle to fine solutions to the current financial crisis. Italy's debt has now reached $2.6 trillion, the fourth largest in the world.

By JAMES B. STEWART
Published: October 28, 2011
NY Times

It finally dawned on me this week that the value of my retirement account might depend on Silvio Berlusconi.

You know Mr. Berlusconi. He is the billionaire prime minister of Italy who not only owns much of the Italian media but also provides them with ample material through his escapades. By his count, Mr. Berlusconi has survived 577 police interrogations and 2,500 court appearances related to innumerable legal and political scandals, not to mention enough suspected sexual adventures to top Hugh Hefner.

And often the adventures and scandals have overlapped. Last year, he was accused of intervening with the police in Milan to obtain the release from prison of a 17-year-old prostitute charged with theft, who said she’d participated in orgies with the prime minister at private villas.

This might have remained diverting tabloid fodder for most people outside of Italy, but this week the country moved to center stage in the European debt crisis, pushing Greece, Ireland, Portugal and Spain at least temporarily into the wings and allowing Mr. Berlusconi to assume what seems to be his natural place, which is in the spotlight. On his 75-year-old shoulders rests the task of shoring up Italy’s finances so that the European Central Bank buys more Italian sovereign debt, to gain French and German support for a larger bailout fund to protect Italy’s banks, and to keep Italy from becoming another Greece and plunging the world into an even more devastating financial crisis.

This remains the case even after the latest effort by European heads of state to put the crisis behind it. Nothing they said could change the fact that Italy has $2.6 trillion in sovereign debt outstanding, the fourth-largest debt in the world after the United States, Japan and Germany. Much of this has to be rolled over — $54 billion in February 2012 alone, according to a Goldman Sachs report. Italy is the world’s eighth-largest economy. Both Moody’s and Standard & Poor’s recently downgraded Italy’s debt ratings and warned of more to come, pushing up borrowing costs and widening credit spreads.

Greece’s debt is modest by comparison, and the fierce effort waged by European banks to avoid a huge write-down on the value of their Greek loans was less about Greece then about setting a precedent that could extend to Italy and other heavily indebted countries. Outside of Italy, French banks have the biggest exposure to Italian sovereign debt — over $500 billion, according to Goldman Sachs. And who knows what institutions (including American ones) insured all that debt?

Although markets keep looking for a quick fix to Europe’s problems, Chancellor Angela Merkel of Germany has rightly said that solving the crisis will be a lengthy process. A critical element is getting Italy’s financial house in order, which includes balancing its budget and spurring growth so that tax revenue grows and borrowing costs stay low.

In August, Mr. Berlusconi promised ambitious reforms to get the European Central Bank to buy Italian debt. Among them were raising the retirement age, raising taxes on the wealthy and opening up the professions to more competition. By last Sunday, as European leaders prepared for a critical meeting on the debt crisis scheduled for Wednesday, Mr. Berlusconi had accomplished none of that.

Perhaps that shouldn’t have been much of a surprise. However reasonable in the abstract, the reforms go to the heart of the Italian way of life, which should be obvious to anyone who has whiled away a few hours in one of Italy’s picturesque Renaissance squares watching Italians leisurely sipping cappuccinos. Although Italy has one of the lowest unemployment rates in Europe (7.9 percent as of August), that’s because so many people aren’t looking for jobs. Only 57 percent of people ages 15 to 64 were employed in 2010, one of the lowest rates in the world. Whatever the official retirement age (60 for women, 65 for men), under Italy’s complex retirement laws anyone qualifies for a pension after 40 years of contributions, and thanks to earlier and more generous programs, many retire even sooner — over half a million Italians retired before age 50, according to a small business group report released this week.

With this week’s deadline for Italy’s reform measures looming, Ms. Merkel and President Nicolas Sarkozy of France took Mr. Berlusconi to the woodshed. You can imagine the chill in the room after Mr. Berlusconi was captured on a wiretapped phone conversation just weeks earlier describing Ms. Merkel’s physical appearance in terms so vulgar that not even most Italian tabloids printed them (although they were widely disseminated on the Internet). Asked at a televised press conference this weekend whether the French and German leaders were reassured that Mr. Berlusconi would carry out the latest promised reforms, Ms. Merkel turned to Mr. Sarkozy, he looked back with an impish grin, Ms. Merkel grinned in return and the room burst into laughter.

In Italy this was taken as an affront to the national character. Milan’s Il Giornale newspaper compared Mr. Sarkozy’s “smirk” to the head butt delivered to the Italian soccer player Marco Materazzi by Zinedine Zidane of France in the 2006 World Cup final — practically fighting words in soccer-obsessed Italy. Even opposition politicians rallied to Mr. Berlusconi’s defense. “No one is authorized to ridicule Italy,” Pier Ferdinando Casini said. “I didn’t like Sarkozy’s sarcastic smile."

The heated reaction is about much more than a few grins at a press conference. I spoke this week to Domenico Fanuele, managing director for Italy at the law firm Shearman & Sterling, who said, “Italians are losing their sovereignty. Someone else is telling us what we have to do, and within a certain time frame, and this has nothing to do with the democratic process within Italy. This is something that is being imposed from outside. On the one hand, it injects some sanity and rigor and discipline into the system. On the other hand, it’s frightening, because it weakens the democratic process.”

“Only the English language has a word for Berlusconi: ‘strong-minded,’ ” Mr. Fanuele said. “There is no such word in Italian. Italian politics is very subtle. Corriere della Sera, a very serious, conservative newspaper, asked Berlusconi to step aside, which was so open and direct. I’ve never seen this in my life.”

Mr. Berlusconi flatly rejected calls that he resign and denied reports this week that he had agreed to do so in order to get his political allies to agree to the proposed reforms. Whatever his fate, the debate has made clear that what began as an economic crisis for the European Union has inevitably become a political one. Out of the wreckage of World War II, Europe forged an economic and monetary union while trying to maintain the political sovereignty of its countries. “There’s a fundamental problem with the structure of the European Union and its leadership,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said before this week’s accord. “The problem is that European actors don’t act in the interest of Europe. They all act in their own domestic political interests.”

Mr. Berlusconi arrived at the summit meeting on Wednesday carrying a new letter of intent, one that seemed just as vague about how he would enact them as his earlier promises. American and European markets continue to gyrate on every twist and turn in Europe, and this time rallied strongly on the latest efforts to contain the crisis, easing at least some of the immediate pressure on Mr. Berlusconi. “I hope Italy doesn’t stay in the eye of the storm for very long,” Mr. Fanuele remarked.

Mr. Berlusconi’s track record doesn’t offer much encouragement, but let’s hope he finally delivers and Mr. Fanuele gets his wish. If not, as Goldman Sachs noted in a recent report, the high exposure of European banks to Italy “suggests the potential for financial contagion could be large.”

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