Another chapter in the Italy political story comes to a close as a government is formed, for how long who knows, but a familiar figure appears to be playing puppet master:
Italian center-left politician Enrico Letta named a coalition government on Saturday, making one of Silvio Berlusconi’s closest allies deputy prime minister and ending two months of damaging political stalemate.
Letta has said his priorities would be the economy, unemployment and restoring faith in Italy’s discredited political institutions as well as trying to turn Europe away from austerity to focus more on growth and investment.
An inconclusive general election in February left Italy, the euro zone’s third-largest economy, without effective government, threatening investor confidence and holding up efforts to end a recession set to become the longest since World War Two.
Letta, the 46-year-old deputy head of the Democratic Party (PD), said he felt “sober satisfaction” after three days of talks with rival parties produced a government that included a record number of women ministers but few political big hitters.
“I hope that this government can get to work quickly in the spirit of fervent cooperation and without any prejudice or conflict,” President Giorgio Napolitano said.
The anti-establishment 5-Star Movement has refused to join a government which party leader Beppe Grillo said “bordered on incestuous” given the relationship between Letta and his uncle Gianni Letta, Berlusconi’s long-time chief of staff.
So Berlusconi’s hands reaches back into the Italian parliament while the new leadership looks to be attempting an agenda very familiar to his own pre-Monti. Obviously, in a year where the German’s are about to have an election talk of steering Europe away from austerity is just that, talk, but as I noted last week there is a growing audience in the ‘core’ who have good reason to side with Italy.
In the meantime Moody’s has again fired a warning shoot across the Italian economy by leaving them on negative watch:
Moody’s Investors Service has today affirmed Italy’s Baa2 long-term government bond ratings, and is maintaining the negative outlook. In addition, Moody’s has also affirmed Italy’s Prime-2 short-term debt rating.
The key factors for maintaining the negative outlook are:
- Italy’s subdued economic outlook as a result of weak domestic and external demand (especially from its EU trading partners) and a slow pace of improvement in unit labour costs relative to other peripheral countries.
- The negative outlook on Italy’s banking system, which is characterised by weak profitability, a deterioration of asset quality and restricted access to market funding, and which indirectly raises the cost of funding for small and medium-sized enterprises (SMEs).
- The elevated risk that the Italian sovereign might lose investor confidence and, ultimately, access to private debt markets as a result of the political stalemate and the resulting uncertainty over future policy direction, as well as contagion risk from events in other peripheral countries.
The key factors behind the affirmation of Italy’s Baa2 rating are:
- Low funding costs, which, if sustained, buy time for the government to implement reforms and for growth to resume.
- The government’s primary surplus, which increases the likelihood that Italy’s debt burden will be sustainable, despite the expectation of low medium-term growth in nominal GDP.
- Economic resiliency, which is supported by the country’s large diversified economy, the relatively low indebtedness of its private sector and the likely availability of financial support, if needed, from euro area members given Italy’s fiscal consolidation progress in recent years and Italy’s systemic importance for the euro area.
Over in Cyprus what everyone knew was going to occur is, that is an ever extending period of capital controls in order to keep the Cypriot banking system alive. Under the bailout agreement, the new Troika plan and pressure from both Russia and Turkey over financial and resource sovereignty the country is in serious trouble and it is little wonder this is occurring:
Cyprus will keep capital controls in place throughout the summer tourist season despite a marginal easing to help struggling local businesses stay afloat, a government adviser said on Friday.
The measures would be lifted only after the restructuring of Bank of Cyprus, the island’s largest lender, a process involving a 60 per cent haircut of uninsured deposits and the acquisition of some assets from Laiki Bank following its collapse last month.
The new date for rolling back is September, but I see no reason to suggest that capital controls will not be in place for well into 2014. I absolutely expect, as we’ve seen with other bailout countries, for Cypriot economic data to come in on the downside of estimates which will continue to put pressure on the government and the banking system for years to come.
Finally, is the little news out of Germany where again the BundesBank appears to be doing its hardest to ensure that periphery Europe has little choice but to give up on experiment ‘euro’, this is particularly interesting in light of the warning from Moody’s on Italy above.
The Bundesbank has lodged a deposition with the German constitutional court (In German) opposing the legality of the ECB’s OMT. Given, as far as I can see, the only thing holding up the entire Eurozone at the moment is the ‘lender of last resort’ function of the ECB I’ve seriously got to question the motives behind such action.
Some readers may feel inclined to dismiss my hypothesis as too far-fetched; too conspiratorial. It is perfectly true that I have no evidence that Mr Weidmann has intentionally embraced a strategy of pushing the Eurozone toward disintegration (thus creating an inexorable dynamic that will lead to the DM’s re-introduction). However, a close reading of the Bundesbank’s constitutional court deposition leaves us with only two possible interpretations. One is that Mr Weidmann does not ‘get it’; that he cannot see that a Greek exit in 2012, or an Italian exit in 2014, would spell the end of the Eurozone; that he cannot see that Mr Draghi’s OMT announcement played a crucial role in stopping the disintegration of the common currency last year; that he has no appreciation of the catastrophe facing good, solid Spanish and Italian enterprises due to the broken down interest rate transmission mechanism. The other is my interpretation: Mr Weidman can see only too well that the above hold unequivocally but is tabling this deposition at the constitutional course knowingly and as part of a strategy that leads the euro to a death by a thousand, almost silent, cuts. You take your pick, dear reader: Do we behold a Bundesbank Grand Error or a Grand Strategy, the purpose of which is to bring about a new hard currency east of the Rhine and north of the Alps, unencumbered by the deficit countries and France? I know which interpretation I would place money on.
Personally, given the history of the Bundesbank, and other prominent and vocal German economists, such as Professor Sinn ,I’m going to have to go the cynical route on this one and take Yanis’ second option.
Finally today, Friday saw the release of ECB monetary aggregates and whocouldanode, they’re falling again?
