Friday, November 4, 2011

Jenga II (After Greece Comes Italy)

Buffoono Berlusconi's Italy May Destroy The EU And The World Economy

Barry Ritholtz, October 31st; "Back Of The Envelope On Italy" (Some editing cleanup, because Barry uses word-recognition software to dictate many posts -- not that there's anything wrong with that -- and too, also, paragraphing):
REVISED: Here’s a back of the envelope calculation on Italy, highlighting the impact that a rise in financing costs coupled with a lack of growth can have on their finances.

Italy needs to refinance about 310b euros of debt in 2012. I estimate the average interest rate they are paying on this maturing debt is 2.7% (short term rates collapsed in ’09-’10). With an average debt maturity of 7 years, Italy may be paying 6%+ on the refinancing.

Assuming a 350 bps [3.5%] additional cost times the 310B Euros of maturing debt, this adds 10.9b euros of interest expense to the 54b euros of interest payments scheduled to be made in 2012. At the same time, Italy’s 2T[rillion Euro] economy is expected to grow REAL GDP 0.1% in 2012 and nominal around 3%.

Thus, nominally 60B euros will be added to their economy with all of the incremental gain thus going to service interest expense. This also doesn’t take into account any new debt Italy has to take on over and above what is maturing.

Over time, just to tread water, any country needs to generate nominal GDP growth equal to its financing costs. In the 10 years prior to the sharp ’08-’09 economic contraction, Italy saw nominal GDP growth of 3.7% (REAL averaged 1.3%), [which was] near its financing costs over that time period.

A continuation of nominal GDP growth of 3.5-4% (now mostly consisting of inflation) will no longer cut it for Italy with funding costs at current levels.

Short version: Without more economic growth, Italy's government cannot take in enough revenue to pay the costs of financing it's debt, meaning they have annual deficits, which add to the debt, which they cannot pay the costs of financing; etc.

Cullern Roche (of the blog, Seeking Alpha) noted: "As we know with Greece, growth is the key. If these nations [The PIGS: Portugal, Ireland, Greece, Spain] cannot grow their way out of this crisis, then they are doomed to deteriorating budgets. The worst part about the situation in Italy is that the growth outlook is the absolute worst of the major EMU nations and has been for a very long time."

So in a sense, even if Greece accepts the drastic medicine prescribed by the ECB, it doesn't solve the problem of Italy's inability to grow its economy -- and the so-called "reform" measures that clown Silvio! claims will work were literally thrown together over a weekend and presented by Berlusconi in a letter to the other EU leaders, who were appalled at Silvio's apparent nonchalance.

It's curious -- Berlusconi, an oversexed toad and greedy Oligarch, Italy's "Little Murdoch", has been the first politician in over fifty years to bring some stability to Italy's revolving-door government -- they've had to dissolve fifty governments in 50 years, because no one political party could build a coalition in their Parliament.

Berlusconi could, and did. And he came along -- as leaders of his type do -- just as the international economic engine began to run on Real-Estate-MBS and CDS gasoline (made in the USA). Times were good, and he seemed to hold out to Italians the promise of stable government, economic policies, and a better future.

As a result they let Silvio be Silvio!; the turned a blind eye to his personal life and financial dealings. When times were good, there was plenty of leeway for him to bunga bunga pretty whores women and preen in front of cameras, ridiculous in dyed hair and Botoxed smoothness. He alienated half of Europe as a corrupt businessman, and made the other half sick from laughter. But, then, Berlusconi was something Italy could afford.

But now, in a crisis, when real and decisive leadership is needed to create a coalition to save the EU and stabilize the collapse, Silvio can't cut it. He's vain, weak, and losing power even in the political party he runs like a private club. He's facing potential indictment for money-laundering and bribery; his 'coalition' in the Italian Parliament has dissolved -- weeks ago, his government barely survived a No-Confidence vote, which would have forced him to resign as Prime Minister. Italian lawmakers, seeing what's at stake, want him out even if the price is another round of revolving-door governments.

The best he can do is draw something on the back of an envelope (the source for Ritholtz's post title) and present it to the likes of Merkel and Sarzoky as a serious policy initiative, as he did recently. They weren't amused.

If Greece accepts the deal offered by the other EU countries, at best it's citizens can expect drastically lowered quality of living for a decade -- and then maybe, maybe their economy will return to 2008 levels, when the wheels were already beginning to pop off.

And the same is true for every other badly leveraged, deeply-in-trouble European nation, like Italy.

So, in a sense, even if Greece accepts the deal, there's Italy's mess. Then, if that can be 'solved', it will be someone else's mess -- Spain, perhaps, or even France, and the cycle begins again. We'll see bank bailout after hedge fund failure (MF Global, no?), with news that money has "just vanished" and no one can find hundreds of millions (a bit like the palettes of shrink-wrapped $100 bills shipped to Iraq in 2003, which "just vanished", too: Good Times).

We find ourselves back where we were a couple of months ago. Growth is critical -- if the EU economies don't grow, the cost of financing themselves (the interest on their treasury bonds) goes up, making borrowing difficult if not impossible. Really drastic action -- deficit spending to push the economies forward -- is imperative, but it won't happen on The Iron Lady or Sarkozy's watch. They're strapped to the Austerity Bandwagon, as it rolls straight downhill.

In the meantime, world markets will become more aware of the Recession (which we never crawled out of) growing worse in 2012 -- and as it does, more Austerity measures will kick in. Public services will close or be severely restricted. Banks will announce -- surprise! -- they were holding even more debt than we knew about. Consumer confidence will fall, and so will the markets.

We'll limp along into an uncertain future of scarcity, high unemployment and political instability, power shortages and a gap between The Elite Rich and The Rest Of Us that will astound you; we will resemble Tunisia, or Egypt, more than the United States, and the fact that we're a DINO (Democracy In Name Only) will become more apparent the farther out in time we proceed. And that's the best-case scenario.

We could, I suppose, always have another little war. But even that would do nothing more than raise tensions and shake up nations already living with levels of psychological uncertainty not seen since the height of the Cold War or WW2. It would provide only the most temporary stimulus to Western economies who are too diverse to depend on 'defense' spending to be the solution.

Worst-case, Greece or Italy or someone else implodes, the Eurozone unravels; and the world's banking and finance sector, corrupted and corrupting, holding on by its fingerprints, collapses in a matter of days and drags the international stock markets down with them. And the dark world I described earlier hits us, full force, and all at once. It will be quite a shock to lose generations of security and surety in the nature of things and people, that fast.

And, that's Jenga.

MEHR: In the aftermath of the G20 conference in Cannes, which failed to create additional IMF guarantees to bail out European TBTF banks and temporarily stop the domino-effect collapse of European sovereign debt, Silvio! continued his government's policy of "Laugh, Clown, Laugh!", oogling the Argentinian minister at the Cannes conference and brushing aside all criticism of his reign by saying Italy's economy was "just fine".

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