Italy is mathematically beyond point of no return, says Barclays

For the Italian economy, growth and austerity are not enough to offset cost of debt.

Italian Prime Minister Silvio Berlusconi has pledged to resign in the wake of a crisis in the Italian economy. But analysts from Barclays say that the economy is mathematically beyond point of return. The danger lies in the fact that high rates reinforce stability concerns, leading to higher rates leading to a deeper conviction of a self sustaining credit event and eventual default. Time has run out for the economy and policy reforms are not sufficient to break negative market dynamics. Domestic investors do not have the patience to wait for austerity and growth to work. The rate of change in negative factors is not enough to offset the slow drip of positive factors.

Barclays reasons that ECB (Eurpean Central Bank) needs to step up to the plate, print and buy bonds. At the moment, ECB is unwilling to be the lender of last resort on the scale needed. But this will be a compulsion forced by the market given massive systemic risk. Yields on bonds above 5.5% lead to an inflection point, after which only the ECB has control. Imminent bankruptcy of his country is what is forcing the hand of the prime minister to pledge to step down.

Italy’s bond yields have risen dramatically in the last month — yields on 10-year bonds have shot up from 5.6% to 6.7%. The main hope of the markets now appears to be that a technocratic government will come in to push through the kind of hard structural reforms that Italy needs. “Italy faces a liquidity crisis, not a solvency crisis” is what patriotic Italians say but it is insufficient to go forward on this simple analysis.

According to MarketWatch, Italian government debt has been relatively stable since it joined the euro, although at a very high level. Its total stock of outstanding government debt is 129% of gross domestic product today, compared with 126% back in 2000. Government spending has been fairly disciplined since it joined the euro. This year, the budget deficit is forecast to come in at only around 3.6% of GDP, which is modest by current global standards. The forecast is for a surplus by 2014. The soaring cost of Italy’s debts might derail those projections. The silver lining is in the fact that much of the north of Italy is as rich as anywhere in Europe — the North-West and North-East regions are at 126% and 124% of EU’s (European Union) average GDP per capita, for example, which makes both of them richer than France or Germany as a whole, and richer than countries we think of as fairly successful, such as Denmark.

Further, Italy has stopped growing. It has been through four recessions since it joined the euro in 1999. GDP will actually contract over the the next 10 years. This is going to make it a lot harder to pay off all the debt. It is not solvent with 1.9 trillion euros of debt outstanding.

Financial markets in Europe were closed when Berlusconi said he intended to quit, but on Wall Street shares rose after the announcement. Earlier, the interest rate on 10-year Italian bonds had edged closer to the danger level of 7% as uncertainty about Berlusconi's political future rattled investors. In Tuesday's vote to approve last year's public accounts, Berlusconi's rightwing coalition won the support of only 308 of the 630 members of the chamber. He will be hoping to persuade the president to call new elections in which Berlusconi could again play a role.

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    Forget Greece, the basket case: Italy’s goose is getting cooked

    Italian PM Silvio Berlusconi has failed to issue growth measures demanded by the EU ahead of the Group-20 summit. Can Italy’s regime pass economic reforms which can restore investor confidence? Don’t bet on it

    The acronym PIIGS (Portugal, Italy, Ireland, Greece, and Spain) seems to have a tinge of prophecy around it, finally. While you have Greece coming out of your ears now, and almost every writer or blogger predicting that Athens will spell the end of the euro-zone as we know it, Italy is now playing spoil-sport. Will Greece and Italy now deal a double-whammy to the great United Currency Concept of Europe?

    Most economists are worrying themselves sick over the Greek economy and the referendum in Greece. There are even calls in Athens for a return to the drachma. Can the lira be far behind?

    With all the brouhaha over Greece, there is less attention being paid to the state of the Italian economy. In Italy, investor confidence is already at a low, and the government is not willing to pass economic reforms aimed at restoring it. The Italian government is in as much a state of chaos as the Greek government. Government bonds in Italy are not yet trading at Greek levels. The only thing preventing the collapse in Italy so far has been the ECB (European Central Bank), whose monetising assistance has been contingent on Italy passing and enforcing austerity measures to deal with its runaway debt to GDP (Gross Domestic Product) of over 120%.

    According to the Wall Street Journal, “Italian Prime Minister Silvio Berlusconi on Wednesday failed to issue growth-boosting measures demanded by European Union (EU) authorities ahead of the Group of 20 summit raising further doubts about the government's willingness to pass economic reforms aimed at restoring investor confidence in the country.” Berlusconi is now huddled with European heads of state, considering what have been called “shock-therapy” measures for the country.

    It is not just the euro-zone countries or the G-20 which has voiced concerns. Italy’s economy might already be in a double-dip recession. BNP Paribas has cut its exposure to Italy by €8.30 billion. And the French-based giant bank has cut its exposure to Greece by €2.26 billion. Italy’s exports have also taken a hard knock.

    And Germany continues to be the powerhouse. The only economy which is strong in the European Union is Germany. Greece and Italy are mired in trouble and the French are just about managing to make their ends meet.

    Of course, with hindsight, one can say that the European monetary union was a harebrained idea. The union should have been preceded by a political union. Take China’s example. The mainland trades in the renminbi; but Hong Kong still has its dollar.

    Berlin, of course, is not sitting pretty. German banks have huge exposure to the beleaguered European nation. And while ‘Great’ Britain stayed out of the monetary union, its economy is nothing to write home about.  

    So why does Europe have this habit of blowing up every 35 years or so? Of course, we are talking about both the World Wars and the current debt crisis. Only the first couple of times, Germany was crushed. Now Greece needs gifts; shoe-shaped Italy (might) get the boot... and Frau Merkel will remain untouched.

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    8 years ago

    Never mind the rest, the article is spot on as far as facts are concerned, which is what the whole point is. Humbly submitted/vm


    8 years ago

    One of the worst commentaries I've read. Go back to grad school.



    In Reply to anon 8 years ago

    Hi there, mind posting under your real name? And, 'Anon', please do write in (with your real moniker) to let us know why this article is bad. Best


    8 years ago

    who wrote this shite?



    In Reply to zalupa 8 years ago

    Zalupa, welcome to the real world. Reading helps, you know. Bad barb, BTW...


    8 years ago

    "The mainland trades in the yen; but Hong Kong still has its dollar". Got mixed up between China and Japan? It should be renminbi



    In Reply to Joe 8 years ago

    Joe, thanks and the error will be rectified. Best regards...

    RBI maintains anti-inflation stance, hikes repo rate by 25 bps to 8.25%

    The Reserve Bank of India continues with its monetary tightening measures to control high inflation, notwithstanding concerns over economic slowdown

    The Reserve Bank of India (RBI) today hiked interest rates for the 12th time in 18 months and maintained that its monetary stance going forward will be influenced by the inflation trend.

    The RBI announced a hike in the repo rate (its main policy rate at which it lends to banks) to 8.25%, even as its monetary tightening appears to have not yielded the results it is looking for so far. The reverse repo rate (at which banks park their funds with the RBI) has also been raised by an equivalent amount to 7.25%.

    With this hike, the policy rate has been increased by a total 325 basis points in one and a half year. The hike in policy rates which will lead to higher lending rates, has already affected the housing and automobiles loans business as well as credit off-take by industry, which is seeing a slowdown in sales. This had prompted expectations that the central bank would take a pause.

    But the central bank said it was too soon to ease its anti-inflationary bias. "A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance," it said.

    Headline inflation for August rose to 9.78%, its highest in more than a year, from 9.2% in the previous month. However, the effect of previous rate hikes is likely to be felt in the forthcoming quarters, economist say, which could lead to the central bank stepping back.

    The news of the rate hike dragged the stock market down by more than one per cent. The benchmark indices, which were mostly positive this morning, dipped to just below Thursday's closing levels, but recovered afterwards in volatile trading.

    The Nifty which opened this morning at 5,123, nearly 50 points up from yesterday, slipped just after noon to 5,068, just under its previous close, then climbed back up about one per cent in the next 30 minutes. It was similar with the Sensex and by the end of trading the benchmarks closed with small gains, as positive global cues helped the market absorb the effect of the rate hike.

    Manufacturing slowed down to 3.3% in July, the lowest in 21 months and lower industrial output together with higher prices has cooled economic growth. GDP growth in the first quarter (April to June 2011) moderated to an 18-month low of 7.7%, against 8.8% in the corresponding period a year ago.

    While inflation in India in largely driven by food and fuel prices, both seen to be beyond the scope of monetary policy, it has recently affected the core non-food manufacturing sector and remains way above the RBI's stated comfort zone of 4% to 4.5%. Only yesterday, oil companies announced a hike in petrol rates by more than Rs3, although the more important diesel prices were not touched.

    Two-thirds of respondents in a poll on the Moneylife website, this week, said the RBI was justified in repeatedly increasing interest rates in the fight against inflation.

    Corporate India reacted gloomily to the rate RBI's 12th rate hike. Dr Rajiv Kumar, secretary general of the Federation of Indian Chambers of Commerce and Industry, said, "The RBI makes a reference to the worsening global growth, but surprisingly has still gone ahead with a rate hike citing a jump in August inflation rate. This increase has more to do with a lower base in the period a year ago. (August 2010 inflation data was the second lowest in the past 12 months and was at 8.9% as compared to an average 10.4% in April-July 2010.)"

    He said that sequential growth in consumption is at a nine-quarter low and that for gross fixed capital formation is at its second lowest in six quarters. "This rate hike will only exacerbate the current fears of an impending slowdown," Mr Kumar warned.

    Commenting on the impact of the rate hike, N Seshadri, executive director, Bank of India, said, "Capex is not happening, investment loans are not happening. The next couple of months will give some sort of indication, but we believe there will be a pause (in rate hikes). So, after that, people will start thinking about fresh investments and we may see growth back in last two quarters."

    Indian Overseas Bank chairman and managing director M Narendra said banks would need to pass on the hike to customers, as the cost of funds has gone up. "I believe banks would wait till the month-end before taking a call on an interest rate hike," he said.

    After the RBI's tough talk today, a Reuters poll of economists today found that more than half of the 12 respondents believed that the central bank would raise interest rates at least one more time this year. The next policy review is on 25 October 2011.

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    9 years ago

    What RBI did is the RIGHT thing, although it is doing it in 'baby steps'.
    INFLATION is the MAIN ENEMY of growth, not interest rate which is only 'rent' for hard-earned savings of the 'aam aadmi'. Interest on Term Deposit must always remain higher than the inflation rate. With persistently high inflation rate, all valuation and financial figures become meaningless fiction, serving only to misguide people.


    9 years ago

    i hopes that this is first time post ofice nsc nsss and other interest rates are less than repo rate .on the name of inflation they are raising int rate but it seems that moto is different.7 5da of central govt employees is raised .what about private sector or common people. gap bet these two type employees is increasing. if any dr. precribes crosin only for fever or high fever till you cures what will happen to patient?
    goverment should change the medicine now


    9 years ago

    For last sixteen months our Finance Minister and RBI is harping on the same tune that with the hike inflation will come down.But so far it has not happen.It will not happen also.I can comment that even RBI will increase another 1% hike in interest rate the inflation will not come down to 7% level.With the rise of interest rate if the Industrial growth will hamper and if the manufacturing industry will have to increase the price rise of their product and at the same time they will pass on to the customer then where the question arise that the inflation rate will come down?RBI Governor should think rationally before taking any decision.It is not a child's play.RBI is sticking to something which is akin to child like behaviour, a stubborn craziness.RBI is spoiling the nations economic structural growth.Please beware.


    9 years ago

    Can anyone explain the logic of increasing the Fuel price and also 25 bps repo rate and screaming about increase in Inflation???



    In Reply to Srini 9 years ago

    mery dare to ask me attitude

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