In the middle of a blossoming banking crisis.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Widespread public disaffection and dissatisfaction are not unique to the UK and US; they’re on the rise all over the developed world. It’s not hard to see why. In the words of Mark Blyth, one of an embarrassingly small number of economists to correctly call both Brexit and the victory of Trump, the last 30 years have seen “a huge amount of economic growth but hardly anyone’s benefited from it.” And now the people are “fed up” and have decided at any opportunity to “give their elites notice that they’ve had enough.”
On December 4th, Italy could become the next whistle stop on the global populist doom tour as its people vote in a national referendum on the government’s proposed constitutional reforms, which seek to drastically curb the role of the upper house Senate, a move that Italian premier Matteo Renzi says will simplify decision-making and ensure stable government. Opponents fear it will make the legislative process more complicated and reduce checks and balances.
The referendum would be a virtual non-event if it weren’t for two key factors: Italy’s blossoming banking crisis and Renzi’s pledge, repeated many times (albeit, ironically, not recently), that he would resign if the constitutional reforms are not passed.
The polls in Italy are neck and neck, though the momentum belongs to the reform bill’s opponents. In the latest poll published by Euromedia 52.1% of respondents opposed his reform agenda, compared to 47.9% in favor. With all opposition parties pitted against him and almost every opinion poll over the past two months showing the ‘No’ camp slightly ahead, Renzi has his work cut out — unless, of course, the polls get it completely wrong again!
If the vote does end up going against the government, expect all hell to break loose.
Despite all the imaginative rescue plans put forward over the last few months, none of the existential problems affecting Italy’s banking sector have been addressed, let alone fixed. According to the Wall Street Journal, if Mr. Renzi wins the referendum, he will find it easier to shake up Italy’s “sclerotic” bankruptcy regime and speed up the processing of insolvency cases — two vital steps given that many of the country’s banks and businesses are on the verge of croaking.
If Renzi loses, rather than dying down, the political and economic uncertainty will surge. The pressure on Renzi to resign will be immense and the gathering exodus out of Italian assets will accelerate. As Reuters reported this week, the Bank of Italy’s liabilities towards other euro zone central banks — what is commonly referred to as its target 2 balance — hit a new record high of €355.5 billion ($393 billion) in October, dwarfing levels seen at the height of the euro zone’s debt crisis four years ago.
The Bank of Italy puts the recent surge in funds leaving Italy down to “portfolio adjustments linked to the European Central Bank’s asset-buying program.” It sounds like a perfect case of central banking obfuscation, but even if true, there are plenty of other inauspicious omens for Italy’s economy. In September industrial output dropped 0.8% and the last month has seen Italian 10-year bond yields soar from just over 1% to 2%, their highest level in over a year, despite the ECB’s binge buying of Italian government bonds. The 10-year yield spread between German and Italian bonds, at 1.62%, just reached its highest point since late 2014.
The biggest concern investors have is that a referendum defeat will spark a new period of political strife in a country that enjoys a hard-earned reputation for political instability and paralysis. That, in turn, will make it even more difficult for Italy’s political and monetary authorities to pull off the already impossible mission of cleaning up the balance sheets of Italy’s biggest banks, which are home to roughly one-third of the Eurozone’s non-performing loans, without plunging government finances even further into the red.
JP Morgan Chase’s rescue of Monte dei Paschi, Italy’s third largest and most insolvent bank, is going nowhere, fast. Last month Goldman Sachs warned in a report that if the Italian public vote no in the referendum, the stalled plan would have to be put on ice indefinitely, as investors wait for the political uncertainty to clear before pledging further funds. This being Italy, the wait could be interminable and the delay fatal for Monte dei Paschi and other Italian banks, Goldman cautioned.
As we wrote at the time, Goldman’s report had one main purpose: intimidating Italy’s electorate into following the government — and EU — line. Whether it works or not waits to be seen. If it doesn’t, the result will be seized on as yet further proof that the EU establishment is losing control of the continent.
Beppe Grillo, a former stand-up comic and founder of Italy’s anti-establishment 5-Star Movement, can hardly wait. Last week he hailed Trump’s victory, seeing it as a vindication of his own maverick stance. “It is those who dare, the obstinate, the barbarians who will take the world forward. We are the barbarians! The real idiots, populists and demagogues are the journalists and the establishment intellectuals,” Grillo wrote on his blog.
For the last three years the Italian establishment has had a field day attacking, ridiculing, and vilifying Grillo’s 5-star movement. Europe’s media have tarred him with the brush of populism. In 2013 The Economist labelled him a clown on its front cover. Yet his party still leads the polls. And if it wins the next elections, which could be brought forward to early next year if Renzi resigns, it has pledged to hold a referendum of its own — albeit a non-binding one — on Italy’s membership of the euro.
And that is why the political elite in Rome and Brussels are quietly petrified of a referendum defeat. The EU has already lost three referendums on the trot — in the UK, the Netherlands, and Denmark. An electoral drubbing in Italy, a country in the middle of a banking crisis, whose economy has been stalled for the last two decades and whose mountain of public debt (130% of GDP) is over twice as large as the maximum limit allowed in the Maastricht Treaty, is hardly likely to further Brussels’ suprastate-building program, especially with do-or-die national elections lurking just around the corner in France, Germany and the Netherlands. By Don Quijones, Raging Bull-Shit.
The “Doom Loop” resurges. Read… Italy’s Banking System on Verge of Nervous Breakdown
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if Goldman Sachs is in favor of it it s probably more self-serving exploitation of working people by financialist and multi-national elites, who have subjugated entire governments by making bad loans, and which now demand that entire countries cut retirements, close schools etc, to pay back debts that never should have been made in the first place.,(and to pile more debt unto more debt), thus returning the developed world to a debt-base neo-feudalism.But people are waking up: they may not know yet who to believe and who s screwing them , but they know not to believe the corporate mass media and of course the self serving politicians who pretend to serve the interests of the electorate, but who have clearly been bought and paid for by the Western Banking Cartel, which has managed to arrange free money for their satellite banks at zero%, multinational corporations at 4% and 8-24% for workers and small business who can can no longer afford essentials, even when working full time. They ve grossly abused their power and their bank charters, and they ve returned us to a new Gilded Age of Corporatist crony government and mega-bank tyranny.
Very well said.+++++
Unfortunately, I know firsthand the credit card and loan rates for the financially damaged are as high as 30%. I don’t see Senator Warren or Sanders lining up to fix the usury laws.
I submitted a proposal to break up my credit card into a “good credit card” and “bad credit card” LOL
That was funny, Gary. And spot on.
You are a Trump voter, right? So why look to Warren and Sanders to fix your problems? Take your complaints to Breitbart.com. They are in charge now
Both Sanders and Warren were on the banking committee showing off with their commentary and then did nothing to stop the crooks. Warren especially has based her political career on helping the financially disadvantage, when in reality she has done nothing for us. I will bet that Trump lands up doing more for working people by accident than those two.
Sen. Warren and Sen. Sanders are powerless to change the laws: they are in the minority in the senate. Republicans control both houses and now the presidency. They are now responsible for all changes or failures to change the law. Democrats are responsible for nominating a Goldman Sacks protege like H. Clinton, whose nomination by dirty tricks to defeat Sen. Sanders, discouraged their own base and resulted in their defeats.
Sergio Marcioni CEO of Fiat-Chrysler has threatened to pull FC out the Fiat operations out of Italy unless it can ‘adopt work practices more resembling those in the developed world’
This could normally be dismissed as a negotiating ploy, but given the oversupply of car production, it may be necessary to relocate to survive.
Marcioni has said there is only room for six car companies ( or car groups) in the world. After the Chrysler buy- he is still trying to bulk up to avoid what he thinks is an upcoming forced rationalization of production.
I’m a little puzzled why someone in Italy who was anti-establishment etc. wouldn’t support the big Communist presence.
“Big Communist presence”?
The Italian Communist Party dissolved in 1992.
Obviously if it’s not socialism, it’s irredeemable.
The PCI, which took the name from the 1926–1991 Italian Communist Party, emerged in 2016 from the merger of the Communist Party of Italy (PCdI) with splinters from the Communist Refoundation Party (PRC), notably including Fosco Giannini’s The Ernesto and Luca Cangemi, and minor groups. The foundation of the new PCI came ninety years after the transformation of the old Communist Party of Italy into the Italian Communist Party.
After the founding congress, Mauro Alboresi was elected secretary by the party’s newly formed national committee.
Thank you for the Wikipedia extract.
Italy does still have a number of parties that call themselves “communist”.
Their combined electoral base is less than 5%, including people who cross the wrong symbol in the electoral booth, people affected by early dementia, practical jokers and the nostalgic.
The only 2 reasons two barely known parties merged to found yet another unheard-of party is a) adding up each other’s subsidies for a party newspaper and b) getting a shot at breaking through the 3% necessary to get into parliament.
Communism is finished in Italy, no more than a running gag.
Makes as much sense as voting for a self-proclaimed barbarian who wants to sever the Italian banks’ only lifeline, the ECB.
Frankly, the whole place sees to suffer from a detachment from reality.
Marchionne. I know English-speakers do not care about spelling.
Oh I do care! But if you read my post you will see a lot of factual comment about a lot of issues, past and present.
I was commenting from memory about Sergio, but names are difficult to remember- there is no correct way to spell many of them- both my names included. Kelly can be spelled Kelley and Nicholas can be spelled without an H.
I’ve managed to memorize the name of the former Russian Minister of Finance, but the name of the cute lady who heads their central bank is tongue twister.
Have a shot at it!
FIAT management has been using that threat since I was a very small boy, so we are going back several decades.
I remember them threatening to move production (mind we are talking about the late 70’s/early 80’s) to Brazil, Poland, Egypt and Turkey, none of which at the time had “work practices more resembling those in the developed world”.
After a while it became tiresome, but it never stopped working.
PSA of France has been using exactly the same ploy for just as long, and it’s not surprising both firms now have part of their production outsourced to Tofas in Turkey despite being at the receiving end of several billions in tax breaks and assorted incentives from the respective governments.
One final word: both France and Italy have already seen their car and automotive components production drop off a cliff since 2000. Apart from the aforementioned outsourcing deal with Tofas, PSA has relocated a large part of its production to Spain and Eastern Europe and is presently building another factory in Morocco which will replace one of the few remaining French plants (possibly Poissy).
Who will have the money to service the debt (at over 8% EAPR) incurred to buy one of those cars, we are not told.
If I follow this- it was all bluff- there is no better place to build cars and parts than Italy and France, and (b) this is now happening.
I am familiar with the struggles of Peugeot- I owned a 1984 505 that had power steering light years ahead of Detroit iron.
A few years ago it tried to close a plant- big uproar from govt- so it stayed open. Then when the company was on the verge of bankruptcy, the government opened its check book.
Unless all I have read re: France is wrong, it would not seem a model to emulate. It is so difficult to lay off workers when the market softens that companies only hire as a last resort.
When Hollande first tried to tackle unemployment, he went on a public sector hiring spree!
His popularity is now in single digits as the sheer math requires reason if not austerity.
Also note the lack of welcome in France to foreign- owned plants.
As someone has said of Britain: there isn’t a British car industry but there is a car industry in Britain.
As a Peugeot fan I was pleased to see them well represented in Uruguay. They have a cute little van called the Partner
Trump offered change, Hillary Clinton was the status quo.
The establishment couldn’t accept their neoliberal ideas had failed and the people had to push them out.
The status quo has failed – wake up – this is the new reality.
Capitalism gets itself into dead ends – 1930s, 1970s, today’s secular stagnation and new normal.
Let’s keep lowering interest rates and adding more QE forever, it hasn’t worked for eight years maybe in a hundred years time it will start to work or perhaps it won’t.
Show me a version of Capitalism that hasn’t failed.
We need to recognise that we have been through many versions of Capitalism and they all fail as this version is failing now.
As John Kenneth Galbraith points out in “The Affluent Society” there is always a desperate attempt to hold onto the “conventional wisdom” that those at the top have invested so much time and effort in.
The death throes of each system are maintained for as long as feasible until it is almost impossible for anyone to believe that the current system can work.
A new system comes along with promises that everything will be much better, and it is, for a decade or two.
Capitalism mark 1 – Unfettered Capitalism
Crashed and burned in 1929 with a global recession in the 1930s.
The New Deal and Keynesian ideas promised a bright new world.
Capitalism mark 2 – Keynesian Capitalism
Ended with stagflation in the 1970s.
Market led Capitalism ideas promised a bright new world.
Capitalism mark 3 – Unfettered Capitalism (Part 2 – Market led Capitalism)
Crashed and burned in 2008 with a global recession in the 2010s.
It has followed the same path as Unfettered Capitalism (Mark 1).
1920s/2000s – high inequality, high banker pay, low regulation, low taxes for the wealthy, robber barons (CEOs), reckless bankers, globalisation phase
1929/2008 – Wall Street crash
1930s/2010s – Global recession, currency wars, rising nationalism and extremism
Unfettered Capitalism has a catastrophic failure mode and dressing it up in the Emperor’s New Clothes of supply side economics didn’t make a blind bit of difference.
We’ve done Neo-Keynesian stimulus.
After eight years of pumping trillions into the top of the economic pyramid, banks, and waiting for it to trickle down. It didn’t work, hardly anything trickled down.
The powers that be are now for Keynesian stimulus.
Carry out infrastructure projects that create jobs and wages which will be spent into the economy and trickle up (pumping money into the bottom of the economic pyramid).
A new brush sweeps clean, the old ideologues stuck in their old failed ways must go.
The Left is still full of neoliberal ideologues; it’s time to move on.
The lack of honest money is the real reason for all the problems. The Governments just print (run debts) there way out of problems. Eventually with all the debt and the distorted price signals capitalism doesn’t work anymore. . It is capitalism fuel by free money (fractional reserve lending) , which leads that leads to instability.
If people want the benefit of a elastic money system they have to live with the disadvantages it has as well.
IMO it has more to do with changing the rules in the middle of the game.
Governments/so called elites don’t like what is happening and they change the rules.
The people/companies can not adapt and chaos ensues.
Finally people/companies adapt and then the rules change again…………
Repeat again and again.
The basis of American success was based on the rule of law and property rights. This included a stable, gold backed currency and a system where everybody knew their rights and where they were in the system.
Skew the system, change it, and destroy what was once called ‘capitalism’ and you get what we have now.
A corrupt system of government for certain elite sectors of the population.
They are laughing at you.
Even if Renzi falls, it’s not going to be a big event. Erdogan releasing the horde is really the event that can tumble everything. Long live Erdogan!!!!
This will happen in 2017 – it is the 2017 Black Swan that swings all the key elections in Netherlands, France & Germany against the incumbents.
Just you watch.
Erdogan has a bone to pick – and pick it he will.
Are you 100% sure?
If M5S wins by a landslide it’s a big deal, for no other reason they are far more euroskeptics than France’s FN and Germany’s AfD and as they are showing in Rome they aren’t easily intimidated by Goldman-Sachs alumni baring their teeth and frothing at the mouth like the rabid dogs they are.
If there’s no clear winner… well, look at what has been going on in Spain and always remember what’s left of Mr Berlusconi’s coalition is already supporting the ex-Communists ruling the country. There aren’t that many other parties to provide the votes needed for a “respectable” pro-EU government.
Yardeni has some nice Target2 charts http://www.yardeni.com/pub/target2.pdf
The direct ECB Target2 link, http://sdw.ecb.europa.eu/reports.do?node=1000004859
Poor frightened people almost always vote conservatively. This is a commonly understood fact of human nature. If the elite are wanting them (us) to vote away our freedom and national sovereignty you’d think they’d be smart enough to spread the wealth to the bottom 99%, at least just long enough to secure our vote.
Then after we’re slaves to their system they could always impoverish us again later. But instead they’re doing the very opposite of what would ensure their electoral success. Go figure.
“you’d think they’d be smart enough to spread the wealth to the bottom 99%, at least just long enough to secure our vote. ”
They thought they had, but we saw what they were up to.
But that’s the problem, they never bothered to spread the wealth. If they had Britain wouldn’t have voted to leave and all the national populist movements wouldn’t exist.
This guy David Seaman, sacked by Huffpo for writing of HRC’s health problems, talks a lot of sense and is research driven.
This guy is a moron.
1. Los Angeles is diversified. They did not choose to focus solely on media and entertainment. They have tons of manufacturing left there, a huge port operation, a tech sector and much more. I pick up and deliver freight in L.A. several times a month, none of my loads ever have anything to do with Hollywood or the media. http://ewddlacity.com/index.php/the-l-a-economy There is a surprising amount of agriculture for crying out loud!
2. The Clinton foundation is likely guilty of many things, but I doubt that child trafficking is on the list.
3. Given Trump’s billionaire status and the names being floated for his cabinet, how can any sane person call him an “outsider candidate”?
I can’t take any more of this guy, he seriously needs his medication adjusted.
Draghi is racking up E80B/mo on Germany’s credit card, this keeps the euro low and places money in the hands of southerners so Germany can have an export market. At some point they’ll be coming to collect the 1st born, Autostrata, Colosseum, Castels and whatever other marbles they can.
Thanks for all your interesting articles/thoughts.
Could you please explain how Italy was able to keep its debt to GDP rate at around 130% without growth for such a long time?
The question is wrong :-]
Italy did NOT keep its debt-to-GDP ratio “for such a long time” at 130%. It’s debt-to-GDP ratio soared from 99.7% in 2007 to 132.7% in 2015, and will be worse still this year.
Two of the reasons why the ratio keeps growing: the economy hasn’t grown over these years, but Italy’s debt has soared.