Italian Elections increase doubts over long term reforms

Italians head to the polls on February 24-25 and never before the political scenario has been so chaotic and appalling.

We are witnessing new political movements like the 5 Stars movement climbing up to third place in a matter of months and never before we have seen Germany actively entering the Italian political debate to try and keep Berlusconi at bay.

 

All this is adding up to financial uncertainty on the future of Italy and at large of the Eurozone.

Pier Luigi Bersani, who heads the centre-left PD was considered the assumed new prime minister just a few short weeks ago, at least in the Chamber (the lower house of parliament).

It's all up in the air now as Silvio Berlusconi's PDL has staged a massive rally in the polls.

Berlusconi has been on a rampage lately blaming Germany and Chancellor Angela Merkel for the unemployment problems in Italy, promising to refund the hated IMU (property tax) and more exotically declaring that tax evasion is justified.

Beppe Grillo's Movimento 5 Stelle (Five Star Movement) which has been largely ignored in the Italian press has been wildly popular at rallies. Grillo has a chance to come in second place.

Mario Monti, who heads the centrist Con Monti per l’Italia (With Monti for Italy) coalition, is running a very distant 4th.

Poll Blackouts

Officially, pollsters cannot post poll results in a blackout period before the election. That blackout period started February 9. Below Reuters' 8th of February polls.



Those results are misleading because they do not include undecided voters, and the undecided vote is a very large 20-25 percent!

With such little difference between Berlusconi and Bersani, and with huge rallies for Beppe Grillo and Berlusconi, any outcome is possible.

Germany Warns Against Berlusconi

Of potentially more importance, Berlin Warns Italians against Berlusconi

Here are a few examples from the story.

German Finance Minister Wolfgang Schäuble reportedly said (but later denied) "Silvio Berlusconi may be an effective campaign strategist, but my advice to the Italians is not to make the same mistake again by re-electing him."

Polenz, a senior member of Chancellor Angela Merkel's Christian Democrats, said: "Italy needs political leaders who stand for the future. Berlusconi is certainly not one of them."

One Italian bank even went so far this week as to issue a report arguing that a Berlusconi election would almost certainly force the country to apply for emergency bailout aid from the EU. Mediobanca, Italy's largest investment bank, wrote that "a last-minute Berlusconi victory would scare the market sufficiently to put pressure on the spread."

"Silvio the Savior"

Spiegel reports Berlusconi's Faithful: 'Only Silvio Can Save Italy'

Adoration of Berlusconi in Italy remains widespread. In the parallel universe occupied by his followers, there is no room for doubt about Berlusconi and lines are clearly drawn. Silvio is good and the others are bad.

These fans gather at his speeches, like the Saturday rally in Palermo, where thousands crowded into the venerable Teatro Politeama. There were women in long fur coats and fine gentlemen in three-piece suits. Dock workers like Ferrante squeezed with them through the entrance, everyone pushing and shoving each other like adolescents at a rock concert. The hundreds who didn't make it in must stand outside.

Fully a quarter of Italians are prepared to vote for Berlusconi again. It is an astounding degree of homage paid to man who faces allegations of abuse of power and bribery; who faces the scandal surrounding the underage escort Karima el-Marough, alias Ruby Rubacuori; who has been blasted for blatantly misogynistic comments; and who broke many promises as prime minister. Instead, the opposition, left-leaning judges and even the Germans are blamed for all that is not right with Italy.

At best, Bersani will win the Chamber and lose the Senate. That would likely result in a hung parliament.

Anti-German sentiment in Italy is high already. The entrance of German politicians into the battle may fuel that sentiment in a major way.

It is conceivable "Silvio the Savior" pulls off a stunning upset win in both the Chamber and Senate, but a Senate victory would still require a coalition (no party will come close to a majority).

It may be difficult if not impossible for any party to form a Senate coalition if Monti's party does poorly as expected.

Regardless Berlusconi there seems to be no good outcome for Italy.

Spain Debt Explosion and Italy's Democracy Implosion

Spain Debt Explosion

Spanish authorities had to come to reality with the regional debt time bomb. It was known that spanish debt was far bigger than their current official data suggested.
Today's news, via the WSJ, confirm that the Spanish government may take over some regions' finances, in an attempt to shore up investor confidence (just as Ireland did with its banks and we know how well that worked out?)
This leaves Spain's Debt/GDP nearer 135% than its 'official' 68.5%.
The WSJ notes comments from a top government official that "there will soon be new tools to control regional spending" and that they may take over at least one of the country's cash-strapped regions this year.  The simple truth as acknowledged by Rajoy is that Spain has lost the trust of financial markets.
It seems that CDS markets have been ahead of the reality in Spain's true credit situation as it is perhaps a little easier to manipulate a few regional bonds than an entire sovereign CDS market.
The velocity of the most recent move suggests some short-term action by the politicians/ECB soon enough though their failed attempt today suggests the wholesale exit of real money is a hole too big for even the ECB to comfortably fill.

Italy's Democracy Implosion

In the meanwhile Monti's government in Italy is starting a crusade against political parties, it has been now some weeks that media have been bombarding the Italian political parties on the corruption issue.
Admirable effort indeed, pity that all Italian newspapers have discovered the rotten state of Italian affairs only 2 weeks ago when an Independentist party Lega Nord which has been shouting for decades its slogan of "Roman Crooks" has been discovered to run multiple fraud and embezzlement operations effectively stealing taxpayer money to cover audacious financial gambles in exotic places as far as Tanzania.

Before Monti government this story would have not even risen eyebrows today is enough to start calls for a major purge of political parties via erasing the public financing that keep them alive.

Let us be clear all Italian parties are corrupted and rotten and what the Lega did has been done by everyone else as a normal practice.

What Italy is facing though is a big illusion, thinking that all this is happening to clean up the country of corrupt and useless politicians is the perfect ruse for the angered and frustrated Italian citizen crying for the blood of those guilty to bring the country to bankruptcy.

Yes, Italian politicians are guilty of betraying the country for their petty interests, as guilty as the Italian citizens who supported them blindly in exchange for favours and the promise of an undeserved job or a blind eye to their stealing and defrauding.

What though is not highlighted by anyone are the real motives behind all this.

This is an attempt to get rid of political parties completely or weaken them to such a state that they will abandon even the slightest opposition to whatever Monti want to do with the country.
This has been happening already since Berlusconi's majority is still in the Parliament approving laws being passed by Monti.
Nonetheless austerity laws are eroding support to parties fast, and some parties have started to raise their voice against Monti fearing a total loss of public support. The most loud protests, surprise, surprise were coming from the Lega and we know how it ended.
Next step for Monti will be to cut the parties' life support, which is public financing, money given to parties by the state and that allow them to operate, once removed the public financing, political parties will be dead and an already ailing democracy will be buried in favour of a soft dictatorship. 
Deserved end for the politicians, not so much for the younger generations that will pay the price.

Italy Exposure to Derivatives

It was nothing more than a footnote in the Morgan Stanley financials; a $3.4 billion pay-out by Italy to settle a derivatives contract made in 1994. Say goodbye to 50% of the tax hikes imposed by the Monti government because that is what was wiped out by this payment. It is also interesting to note that that Mario Draghi, currently President of the European Central Bank, was the Director-General of the Italian Treasury when this derivative was formulated. Then comes the bomb, only mentioned in a brief article on Bloomberg, and not noted anywhere in the Press. Marco Rossi Doria, an undersecretary in Monti’s administration, tasked with responding to a parliamentary interrogation on derivatives, admitted that the Italian Treasury had $211 billion in "notional" exposure to derivatives, which is around eleven percent (11%) of Italy’s total GDP. This new exposure now brings Italy’s actual debt to GDP ratio to a whopping 144.3%.
Expect further corrections of Monti's government in the following months, the ransack of Italy to cover derivatives contracts is likely to continue for years.

Has Italy Gone Fascist?

Form Zero Hedge, worth reading!


Has Italy Gone Fascist?

In August this year, CLSA’s Russell Napier wrote: “Italy is scary – yields will rise when governments chose to take money from their savers – what Russell calls THE GREAT THEFT - Expect massive capital flight”.  Yet while Russell was commenting on Italy’s opening move in repressing private capital by raising the capital gains tax, but not on gains of government debt, the situation has moved with such speed over the past 5 months that the emergence of the first Fascist regime following the 2008 crisis can probably now be associated with the new Monti government.
It may be time for Italian to get themselves as well as their capital even faster out of Pizzaland.
Here are the latest developments which are coming in at extraordinary speed:

• The appointment in December of an unelected government. This government has no accountability and no fixed time mandate. It is being sold as being “technocratic”, but is in fact headed by a University Professor who is distinguished for: (i) having been head of the EU Internal Market Commission, where he used the power of the State to fine Microsoft and other corporate that were “getting too big for their boots”;(ii) being a good friend of Romano Prodi, another University Professor from the Communist  heartland of the University of Bologna and creator of the Euro (more on him later);(iii) a paid hand of Goldman Sachs and a friend of Mario Draghi, another Goldman puppet who dispatched of the government of Berlusconi within days of taking the helm of the ECB; (iv) a fervent believer in the pre-eminence of the state over the individual;

• Prodi, the original architect of this catastrophe, famously made this comment in 2001, indicating that this cabal of Professors are playing a very long game indeed:

I am sure the Euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.”

Romano Prodi, EU Commission President, December 2001

• Thanks to his friendship with Monti and the current government, he is very much still involved in shaping just what such instruments can be;

• The passing of an extraordinary edict making cash transactions of more than Euro 1,000 illegal (not subject to reporting – just plain illegal). Following Prodi’s own desire, the existing regime has indicated that this level will be progressively reduced to a limit as low as Euro 300. Hence cash is maybe for the first time in history no longer legal tender (over Euro 1,000, for now);
• A requirement that credit card companies report all transactions carried out by Italians, in Italy and abroad to the fiscal authorities;
• Delays and refusals by banks in allowing customers to withdraw  cash balances of as little as Euro 10,000;
• Finance Police has placed cameras at the physical borders with Switzerland (see below) to register all license plates. In addition, currency-sniffing dogs have been deployed at the border (http://www.cdt.ch/ticino-e-regioni/cronaca/56250/fiscovelox-riapparsi-no...).

Events in Italy must be watched closely.
And while Russell Napier (correctly) foresees capital controls being imposed and suggested that one parks his cash in Singapore dollars, Italians may want to get themselves out as well before the current group of Professors slams the gates shut. Things are moving even faster than one of the world’s leading financial historians could foresee.

Save Italy!

Finally Italy appears to be ready to pass an austerity package just 6 months after it became the next domino tile in the Euro collapse.
Measure to be approved before the end of the week are the following:

1. Raise more than 10 billion euros from a new property tax
2. Impose a new tax on luxury items like yachts
3. Raise value added tax
4. Crack down on tax evasion
5. Increase the pension age

The above package was dubbed the "Save Italy" package by Prime Minister Mario Monti. Supposedly it will boost growth.

While I agree pension reform is much needed, there is not a single thing in the package to boost growth. Italy is in recession. Raising taxes in a recession is the last thing you want to do, yet four of Monti's five ideas raise taxes.

This proposal may temporarily placate the bond market, but Italy is headed for one "super recession"
Italy needs to cut wasteful government spending which is totally out of control but at this stage Monti unfortunately still need support of cronies and corrupt politicians who would sink Italy rather than lose their entrenched priviliges and wasteful spending which is supporting their cronies.
Monti has been appointed by the EU (aka France and Germany) to ransack the private wealth in order to cover foreign bank losses but still need every single piece of law to be approved by the same corrupt parliament which was supporting Berlusconi just weeks ago.
It will be a long friction war and hopes for a real reform of the country are far from being realized in the actual situation, market punishment will occasionally remind politicians of who is really in charge in Italy but deep reforms with this political class still with voting power are an illusion.
Money can be found only where no vested interests are present, therefore unfortunately once again the unrepresented and marginalized will pay the steepest price to this crisis.

IMF voiced to prepare an emergency 600 billion loan to Italy

Some stories in European press suggest that Italy is working on a very big loan package from the IMF according to the newspaper Repubblica a loan of 600 billion euro is being considered for Italy.
I'm very curious to find out what kind of tricks the IMF will resort to find this amount of money which is much larger than the current EFSF allocation.
If this option is being considered it means that there is zero possibility that Italy can refinance any portion of its $300b of 2012 maturing debt. If there is anyone who think that Monti can pull off a miracle, they are deluded, he is simply in charge of seizing the private wealth accumulated by Italian citizen to cover for the enormous Italian public debt and compensate foreign investors and banks in the process. There is a zero chance for a market solution for Italy. Either the ECB (aka Germany) steps in and underwrites the debt with some form of Euro bonds or the IMF (aka the USA) steps in with some very serious money.
Italian bond yields more than doubled in a month and this has left banks and financial institutions scared to death.
Either this gets fixed or Italy defaults in less than six months. The default option is not really an option that policy makers would consider. If Italy can’t make it, then there will be a very big crashing sound. It would end up taking out most of the global lenders, a fair number of countries would follow into Italy’s vortex. In my opinion a default by Italy is certain to bring a global depression; one that would take many years to crawl out of. The policy makers are aware of this too.
Something is brewing. If there is a plan in the works it must involve the IMF and it’s going to be big.

In the real world of global finance the reality is that any country that is forced to accept an IMF bailout is also blocked from issuing debt in the public markets. IMF (or other supranational debt) is ALWAYS senior to any other indebtedness of the country. That’s just the way it works. When Italy borrows money from the IMF it automatically subordinates the existing creditors. Lenders hate this. They will vote with their feet and take a pass at Italian new debt issuance for a long time to come. Once the process starts, it will not end. There will be a snow ball of other creditors. That's exactly what happened in the 80's when Mexico failed; within a year two dozen other countries were forced to their debt knees.
There is unfortunately not anymore a safe exit from this mess. The liquidity crisis in Italy is scaring us to death, the solution will almost certainly kill us.

Italy to cut 300,000 public sector jobs

This piece of news has not been reported yet on the Italian press clearly to avoid major uphevals both in Parliament and on the streets:


Bloomberg: Italy Letter to EU Pledges Public-Sector Job Cuts, Tax Overhaul

Italy plans to cut public-sector jobs, overhaul the tax system and introduce incentives for venture-capital investments, the Finance Ministry said in a letter to the European Commission.

Italy plans to raise its retirement age faster than other European Union countries and to cut 300,000 public-sector jobs by 2014, according to the letter, a copy of which was obtained by Bloomberg News.

The nation will also reduce income-tax brackets from five to three of 20 percent, 30 percent and 40 percent, according to the letter, which provided clarifications sought by the commission to a document delivered to the EU by former Prime Minister Silvio Berlusconi last month.

Italy will provide incentives to venture-capital investments in small- and medium-sized companies, while a reintroducton of a property tax called ICI could bring in an additional 3.5 billion euros in revenue, according to the letter.

Berlusconi resigned on Nov. 12, leaving the fate of Italy’s pledges to the EU unclear.

Here is the full statement to the EC:
MEF_ITA_EC