Time for The Italian Job?

In a year of events which were seemingly considered unexpected and at times unthinkable by the establishment we now face another role of the dice. This comes over the weekend in Italy. There is an irony that on the face of it the issues are domestic ones. As the Guardian describes below.

A series of major changes to the Italian political system. These reforms, which affect a third of the Italian constitution, have already been approved by parliament but by a slim margin, thus requiring that they also be passed by referendum……Under the proposed reforms, the Senate would lose almost all its power – the number of senators would be reduced from 315 to 100, and the remaining senators would no longer be elected directly.

The idea is to speed up legislation by in essence going from 2 political chambers to one to stop this sort of thing happening.

his means, put simply, that it can take a very long time for things to get done. For example, a law to give children born out-of-wedlock the same rights as children of married couples took nearly 1,300 days to be approved.

How very Italian! Which is of course part of Italy’s charm and also part of the problem. Another sign of this being Italy is that apparent reform involves creating an unelected second chamber. But the fundamental issue is that as so often happens the question on the ballot paper has morphed into becoming something of a vote on Prime Minister Renzi himself. Not perhaps the best plan when anti-establishment forces seem to have the upper hand. But as ever I will leave the political debate alone.

The economics

I recall that the appointment of Prime Minister Renzi was claimed as a new dawn for Italy and that his reforms would lead to much better economic growth. I remember asking supporters what changes were about to happen? If we look at yesterday’s update some 2 and a bit years down the road there seems to be little sign of progress.

In the third quarter of 2016 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.3 per cent with respect to the second quarter of 2016 and by 1.0 per cent in comparison with the third quarter of 2015.

The progress that there has been sees annual economic growth at 1% as opposed to 0.3%. So higher but of course feeds right into my theme that Italy struggles to get its economic growth rate above 1% in the good times. Are these good times? Well ECB President Mario Draghi keeps telling us that it is the negative interest-rates and QE bond buying of the ECB which has pushed economic growth higher. Also this has been a phase of a lower price for crude oil and indeed other commodities which should also have boosted the Italian economy. As per yesterday’s article that may be fading but as we look back it has certainly been in play.

Actually Mario Draghi may have been thinking of his home country when he said this in Wednesday.

Without concerted effort on structural reforms, per capita income growth in euro area is likely to stagnate or even decline

Per capita GDP has fallen by around 6% since it joined the Euro by my calculations. Whereas he is pointing out he things others have made ch-ch-changes.

Reforms in Spain in mid-2012 are example of a structural reform that has been successful in unblocking the labour market.

What country was he thinking of as a comparison with Spain here as he is interviwed by El Pais?

It is also true that Spain enacted reforms and repaired its financial sector earlier than others, which has proved crucial.

Every ECB meeting there is a part of Mario Draghi’s speech which is as nailed on as say Sergio Parisse in the Italian rugby team. It calls for structural reforms and is an example of rinse and repeat.

The banks

Last weekend the Financial Times shifted towards panic mode.

Up to eight of Italy’s troubled banks risk failing if prime minister Matteo Renzi loses a constitutional referendum next weekend and ensuing market turbulence deters investors from recapitalising them, officials and senior bankers say.

I guess you are wondering which 8?

Italy has eight banks known to be in various stages of distress: its third largest by assets, Monte dei Paschi di Siena, mid-sized banks Popolare di Vicenza, Veneto Banca and Carige, and four small banks rescued last year: Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara.

Not Unicredit? That would make nine like say the Nazgul.

Monte Paschi

Let us stick with the world’s oldest bank for as moment and there is maybe a saviour on the horizon. From @creditmacro.

MontePaschi may sign preliminary investment agreement with Qatar Investment Authority between Saturday and Monday, Il Sole 24 Ore reports.

Mind you to that ying there is also a yang as Reuters have just reported.

Italy is discussing with the European Commission the terms of a state bailout of ailing bank Monte dei Paschi (BMPS.MI) that has already been requested and could be launched next week if needed, Italian daily Corriere della Sera reported on Friday.

Italy’s third-largest bank needs to raise 5 billion euros ($5.3 billion) by the end of the year to plug a capital shortfall identified by European Central Bank stress tests or face the risk of being wound down.

Care is needed as we have “may” on one side and “could be” on the other. But we do at least have an official denial and we know what they mean! From @livesquawk.

Italian Govt Undersecretary: MontePaschi Will Not Need State Help – ANSA

Anyway the Bank of Italy is dreaming of the future as it let is know on Wednesday.

The Bank of Italy has identified the UniCredit, Intesa Sanpaolo and Monte dei Paschi di Siena banking groups as other systemically important institutions (O-SIIs) authorized to operate in Italy in 2017. The three groups will have to maintain a capital buffer for the O-SIIs of 1.00, 0.75 and 0.25 per cent respectively of their total risk exposure, to be achieved within four years according to the transitional period shown in Table 1.

So SII has replaced SIGI which replaced TBTF ( Too Big To fail) as we go acronym crazy. Do I have that right?

Oh and if you are systemically important should they not all have the same thresholds?


We find ourselves facing for the first time in 2016 an event where this time the “shock” result is the expected one. Accordingly financial markets should have made much of their adjustment already. Although on the face of it I find it is hard to see much insurance in an Italian two-year government bond yielding 0.22% or indeed a five-year one yielding 0.89%. But perhaps as Reuters reports Mario Draghi has a put option ready for them.

The European Central Bank is ready to temporarily step up purchases of Italian government bonds if the result of a crucial referendum on Sunday sharply drives up borrowing costs for the euro zone’s largest debtor, central bank sources told Reuters.

Ah that word “temporarily” again! Those most annoyed by this should be the Portuguese who have much higher bond yields but by contrast have seen fewer bond purchases than their theoretical share.

As for the Euro it has drifted lower recently as we note an exchange-rate around 1.06 to the US Dollar and the UK Pound has regained ground to 1.18. The trade-weighted move has been from 96.1 to 94.4 so relatively minor. However looking forwards whilst there could be a knee-jerk fall surely an increase in the possibility of Italy leaving the Euro makes it more of a “hard” and “safe-haven” currency so it could later rise.

Don’t get a job involving numbers

This is from a Bank of Italy working paper on undeclared assets.

Third, it estimates the portion of tax evasion connected to the underreporting of foreign assets to range between $20 trillion and $42 billion a year over the period 2001-2013 for capital income tax,

Thanks for that!



16 thoughts on “Time for The Italian Job?

    • Hi am

      There are nearly always a few things going on at once! But as I put in the piece a Euro without Italy will be in theoretical terms stronger as a major weak economy departs. Of course though that is just looking at Italy in isolation and ignoring any contagion effect on the Euro project.

  1. “Up to eight of Italy’s troubled banks risk failing if prime minister Matteo Renzi loses a constitutional referendum next weekend” – FT.

    Assisting in an Italian version of Project Fear perhaps?
    Problem is, most of us dont lose any sleep over banks and their concerns anymore.

    • Hi Tim

      Fair enough in itself but there are a couple of nuances here.

      1. If Italy finds itself having to start a or some bank bailouts that puts it in breach of Euro area rules.
      2. If it applies the rules and has bail-ins then the retail investors who were miss-sold bonds in the banks will lose much and maybe all of what they were told were safe investments.

      So on either road there is trouble on the horizon…

      • Yes, it depends if any politically connected French individuals and/or banks will lose money. It is okay for Cypriots to lose their shirts in a bail in, but the EC reacts otherwise when French will lose their shirts.

  2. If there is a run on the Italian banks, after the referendum, the ECB will do “whatever it takes”. This will include, throwing money, which they have not got, at the problem, ignoring their own rules on what mechanisms can be used and how, and allowing Italians banks to carry on as normal until the next time. They will then take all the credit for solving this crisis, single handed! Job done!

  3. Politicians who wish to meddle with constitutions rarely do so with good reason.
    I don’t claim to speak for any Italians, but enabling the hasty passing of laws is one of the poorest.

    • Down here in NZ some people regard the unicameral legislature (the upper house was abolished in 1951) as a parliamentary dictatorship. When the Government recently lost a case (about paying care workers the minimum wage, I think) it simply changed the law to avoid implementing the Court’s decision. Lack of oversight and scrutiny does have consequences.

  4. Sack all 315 of Italy’s upper chamber, it will help reduce Italy’s deficit. Replace them with the Swiss system of oversight -> binding plebiscite. Democracy is meant to be for the people, by the people.

    • Hi ExpatInBG

      There is much to be said for the Swiss system I agree. Have parliamentary democracy for ongoing issues but for specific ones have a referendum. It could also apply to the UK and would allow us to get rid of the bloated House of Lords or just keep a small rump as a type of heritage theme park

  5. Abolition of second chamber is anti democratic so this has no chance of passing.
    We are only playing for time constant central bank support for unrepayable debt is unsustainable …there are cracks in the dam.
    When will it break ,6 months ?6 years ?who knows but this will come to a devastating end.
    The problem with $152T debt is counter party risk and those who think that a promise to repay is an asset…..not when it ends in default

    • Hi Private Fraser

      Moving to the central bank the ECB it has been an odd week. It has promised “more” as not only were hints made about Italy they were about a further QE extension. However it also said that one day a taper will come although of course that may be because it has run out of bonds to buy!

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