November 10, 2011


So what exactly has changed over the last few weeks in Italy, a country that, in my experience, doesn't change much fundamentally over time, that it is now suddenly the world locus of financial crisis? Or is Italy just next on the list now that the financial community has gotten what it can out of the Greece situation?


eh said...

Yet higher heightened recognition of what one might call (ahem) a structural problem: a fertility rate significantly below replacement combined with an economy/productivity growing too slowly to foster confidence in Italy's ability to service its growing debt.

Please watch your email -- Italy may soon contact you about putting up their own 'Donate' button on your site.

And there is a lot more to be 'gotten out' of the "Greece situation".

gwern said...

It's next on the list, and everyone knows it's next on the list, which means they can coordinate in attacking it, which makes it that much more likely to fail - the entire cycle of which is obvious and thus encourages the cycle to spin harder.

In short, shorting Italy is now a

Eric said...

What's changed is potential bond buyers think there's an increased risk they won't get their money back, whick in turn makes that more likely. I don't see any evidence of an evil conspiracy. We're going to see the same thing in Portugal, Spain, and Ireland. And, eventually, in the US if we can't get serious about our fiscal problems.

Matt said...

Interest rates on 10 year bonds went from 6.4% to 6.8%. Or something like that. Riveting, I know. Someone on Rod Dreher's blog made the apt comment that this Euro crisis is like getting run over by a glacier. By the time anything happens, we'll all have died from boredom or possibly old age.

Italy itself is actually in good shape, the people have better financial situations than Americans do, aside from the ongoing problems in the Mezzogiorno that is. It's just the government that has a financial problem. Naturally, the topic now is the best way to loot the citizenry to pay the government's bills.

dearieme said...

It is, I suppose, rather unlikely but there must be a slight chance that the great eurozone destruction machine was deliberately designed to be such by people acting in the interest of the Soviet Union of late memory.

Either that or they were criminally stupid and reckless. As for your question: it doesn't matter. When hot gasoline is gushing everywhere, it will find a source of ignition.

Anonymous said...

Spain next we'll see if they bite. One thing that's for certain, the Eurocrat democracy is a sham.

Simon in London said...

The latter. You have heard of PIIGS, haven't you? They're going through Ireland-Greece-Italy-Portugal-Spain, and may have a go at France, which apparently is also in big trouble fiscally. However, Germany will intervene to save France in a way she won't for Italy.

Simon in London said...

The EU is built by ideologues, they certainly don't care how much human suffering goes into creating their empire. Omelettes, eggs, etc.

Anonymous said...

After Italy will be Spain ... then France.

Like the US and UK, Europe (save Germany and Finland) has borrowed much, spent much, saved little. Now Southern Europe needs to roll over its debt at a time of recession, but the prices asked by the market are such that they may soon find 20% of their tax take is needed to service the debt - implying massive cuts in services, economy shrinks, less tax - a debt spiral.

So we see an interesting spectacle - Chancellor Merkel of Germany lambasting the Greeks and Italians for borrowing and spending too much, and preaching austerity to them. But soon will come the French, US and UK, lambasting the Germans for not printing Euros the way the US and UK printed dollars and pounds.

"You want more of our IMF cash, because you're too squeamish to print? We debauched our currencies - you can damn well debauch yours! And if you don't, there'll be a global depression - and it'll all be Germany's fault!"

Laban Tall

Fred said...

Italy's government debt is too expensive to finance at >7% yields. What Italy has in common with Greece is overly generous government pensions (with some people retiring in their 40s). But Italy isn't Greece: it's got a competitive economy, and the private sector in Italy is pretty flush.

So, by taxing some of that private sector wealth, or cutting back on some of those pensions, Italy could balance its budget and pay down its debt. Or it could ditch the Euro and go back to the Lira. That would lead to a boom in its exports due to the cheaper currency, but it would also blow up the Eurozone, because Italian government bonds are held by major banks outside of Italy, and getting paid back in cheaper Lira instead of Euros would blow enormous holes in their balance sheets.

Anonymous said...

"Germany will intervene to save France in a way she won't for Italy."

I suspect this, too. Can you get more insight on why?

Whiskey said...

Steve -- commenter eh is correct, add to that chronic overspending (using borrowed money at low eurozone rates to finance ongoing government handouts to buy social peace/graft, like subsidized housing and various boondoggles) and widespread tax evasion.

A year ago, Italy was assumed to be growing more than it actually was (cooked books) and had promised to cut down on tax evasion, cut spending/subsidies/graft, stimulate the economy by lifting graft-related regulations (payoffs required to start/expand business) and so on. None of that happened.

Meanwhile the EU (principally Germany, France, and the Netherlands) have been trying to damn the floods with bags of money. For a while it looked like only Greece and Portugal would have to be bailed out, but Spain is on the brink, Ireland can't sustain much longer its austerity measures, and France is now showing it is a house of cards.

If France, Italy, Spain, all had growth of around 3%, they could probably squeak by. They are IIRC in negative figures, slightly, in official recession. There is not enough money to bail them out, so the EU will collapse, with serious consequences. On this one Paul is right -- the Gold standard protects the consumer. From inflation.

munch said...

The USG throws on about an extra trillion $$ of debt each year and things are going soothingly.

What has changed in Italy is what is about to change in the USA - the accumulated debt and current borrowing, at some unknown tipping point, becomes obviously unsustainable. Before that point lots of people will lend a wealthy country money; after that point interest demanded by lenders goes up. The higher interest rate to roll over old debt makes the break a serious paradigm shift. The change applies not only to what you want to borrow today but what you must borrow to pay maturing low-interest obligations of the past as well as the interest itself. Seemingly overnight your countries' financial prospects are different.

Harry Baldwin said...

Matt said...By the time anything happens, we'll all have died from boredom or possibly old age.

You really think so? This reminds me of the scene in "Homer the Heretic":

Homer: God, I gotta ask you something. What's the meaning of life?

God: Homer, I can't tell you that.

Homer: Come on.

God: You'll find out when you die.

Homer: I can't wait that long.

God: You can't wait six months?

Doug1 said...

What munch said.

The Italian situation really isn't that dire. Their debt to gdp ratio is at about 100%, it's 150% in Greece and Greece's gdp shrank over 5% this year and is projected by the Greek government to shrink by 2.5% next year, which is probably underestimating how much it will. In contrast Italy is at about zero gdp grow now and next year. Well it's been at about that for most of the last decade which is a lot of the problem.

Before the 50% haircut on Greek privately held government debt was announced greek bonds were trading at an implied high 20's percent interest rate. In contrast Italy's is in the mid 6%. Italy can probably afford doing rolling refinancing at that rate but it's painful. If they need help with a lower bailout rolling refinacing it would only be for small percentages of their debt at a time.

Basically the Eurozone is placing tons of pressure on Italy to cut more to drive down the interest rate so they don't need any bailout.

Evil Sandmich said...

I always thought that part of the problem was that Italy couldn't force Italian Euros to 'come home'. If they were on the Lira, people would have no choice but to buy Italian debt (or goods), but it's rough having a competitor in your own currency when it comes to the bond market, no?

Like, imagine if Germany began selling dollar denominated bonds; what would the market be for American dollar denominated bonds?

Seismic Puppy said...

Make em an offer they can't refuse.

PS. Wasn't the Mozilla guy Italian-American?

Eric said...

Interest rates on 10 year bonds went from 6.4% to 6.8%.

Yes, but 7% is some kind of magic number for sovereign debt, in that traders have to post more collateral because it's considered more risky. So the theory goes as they cross the 7% line demand for their bonds drops, the interest rate goes even further up, and suddenly they can't roll over their existing debt. Now that they can't roll over existing debt that makes default (partial or otherwise) more likely, which will push rates even higher.

Italy needs to roll over about 20% GDP worth of debt next year.

Thing is, unlike Greece, Italy's primary deficit is only around 4%, so the only reason they're in trouble is they have a lot of debt to service. If they just default the wheels won't come off like they will in Greece.

Jim said...

Munch -

Nope. Italy and the US (or Japan or the UK or Botswana any other country with a soveriegn currency, no matter how rich or poor), is that Italy has to borrow money, while a sovereign currency issuer doesn't. While the US issues bonds, and it seems like it is a "borrowing" operations, in fact the money to buy the bonds comes from money that has been spent into the economy by the issuer. It is an asset swap - the currency issuer spends money into circulation, and then offers bonds to people who want to earn interest. The rate is ultimately a policy vaiable - set by the Fed, with longer term rates inedriectly set by markets that try to guess what the Fed will do.

Italy is like a US state = it has to offer a high enough interest rate to attract money, or it will go elsewhere. For the U.S. Gov., there is no other place to go for the dollars it alone creates.

That's why Japanese interest rates are till at zero despite a debt over 200% of GDP, even though people like you have been warning the jig was almost up for over two decades now.

It always astonishes me that otherwise smart people have so much trouble understanding the simple mechanics of the monetary system.

Anonymous said...

The problem is Italy is not a currency user and thus cannot print money. Therefore, it can actually default on its debt. The ECB could actually save the day by financing Italy but Germany will prevent that from happening. Thus, there actually is a real crisis here.

Seismic Puppy said...

It seems like California went from being the Germany of America to the Italy of America.

munch said...

"Nope. Italy and the US (or Japan or the UK or Botswana any other country with a soveriegn currency, no matter how rich or poor), is that Italy has to borrow money, while a sovereign currency issuer doesn't. While the US issues bonds, and it seems like it is a "borrowing" operations, in fact the money to buy the bonds comes from money that has been spent into the economy by the issuer. It is an asset swap "

An asset swap would be voluntary. It is an asset rape.

Second, whether you issue fiat currency or trade in gold, nothing comes out of thin air.

munch said...

Germany, Austria, Poland, Zimbabwe and Hungary controlled their own currencies, right before their currencies became worthless.

What it is about reality that makes you retreat?

Anonymous said...


Italy's government debt is too expensive to finance at >7% yields.

Oh, absolutely. No question about it.

Don't worry that interest rates were well into double digits all through the late 80s to early 90s or the real interest rate was actually even higher than today. That's meaningless.

And ignore too that Italy's gross debt position (as a proportion of GDP) was essentially the same as today back in the mid-90s, and that the net debt position was even worse (albeit not by much). That's meaningless too.

This time it's different.

This time it's THE END.


Anonymous said...

On this one Paul is right -- the Gold standard protects the consumer. From inflation.

Maybe. But it's certainly not necessary.

Firstly, wages over time rise in lockstep with inflation, so there's little to worry about here.

Secondly, 3-month T-bills dating back to the mid-50s would have seen you come out way, way, way ahead of inflation over that 50 year period. There was a scare in the mid-70s when inflation exceeded the coupon rate by a couple of percentage points per annum, but that's hardly the sort of thing to destroy your savings (the way amateur goldbugs sometimes suggest).

Thirdly, there isn't really much clear evidence that high inflation is all that bad for the economy in general. There is this notion among economists that it 'devastates' an economy, but there have been examples of economies that have grown at a very steady pace over long stretches of high inflation.

Assuming the IMF data [scroll down] is accurate, Iceland's GDP doubled between 1973 and 1989, yet inflation ran about 20% every year save one and in half the years above 40%. That's an annual GDP growth of 4.4%. And since Iceland's population wasn't exactly exploding over that time period, it's very impressive on a per capita basis also. (I really hope those inflation figures are accurate cos this is one cool anecdote.)

Israel's another example. Inflation ran over 100% for six straight years, 80-85, including over 300% the last two, but it doesn't appear to have 'devastated' the economy. Unemployment was below 6% each year. The economy grew very slowly for a few years but if you consider the protracted Lebanon thing at the time it's not clear this should be attributed to high inflation.

There are other examples, too.

I'm not necessarily saying inflation is awesome, only that it's not clear it's the scourge of economies it's often described as.


Simon in London said...

>>"Germany will intervene to save France in a way she won't for Italy."

I suspect this, too. Can you get more insight on why?<<

That's what happened when the ERM partially collapsed in the early '90s. Since the end of WW2 the Franco-German axis has been the cornerstone policy for both nations. Germany will do pretty well anything to maintain it. The alliance gives the two countries control of Europe, which is the French motivation. The Germans believe that if the alliance fails then Hitler will rise from the grave and Germany will start invading other countries again, which would be bad. Merkel recently said as much.

The French have a more or less rational quest for domination, and see the alliance with Germany as a vehicle for that. The Germans have a more or less irrational fear of Germans, and see the alliance as a way to 'die down' Germany. But of course it also gives Germany a means to non-violent political domination of Europe.

Anonymous said...

If Italy was independent it would be able to muddle through in its own peculiar Italian way and find Italian solutions to Italian problems.
This is what it did for most of the post-war period, and Italy actually grew at quite a respectable rate.Granted it always had high inflation and high borrowing, but Italians were frugal savers and domestically funded their own debt.
The real disaster is the Euro currency.A flawed and f*cked up system from the start (yet most of the economic establishment praised it to the skies prior to its introduction - economists are essentially a worthless, useless profession).
Very powerful forces tried to drag Britain in to it.If Britain was in it would be just as f*cked as Italy right now.Only a handfull of rightwing Tories stopped it in its tracks.
The point is that the Euro is, essentially, a political currency designed as the preamble and ever of fiscal and political union - there is no other justification.It was forced through by a profoundly undemocratic Euro elite without recourse to democracy, the Germans never had a chance to vote on it.
What we are seeing now is the price itizens must pay for elitist scheming and empire building.

Jonathan said...

The fundamental problem with Italy is lack of growth. Cumulative real GDP growth has been negative 1.7% over the past five years (the economy shrank in 2008 and 2009). Even in good years the economy only grows about 1%. This is the result of deep structural problems that won't disappear any time soon. Poor growth ensures that Italy's already enormous debt will keep growing, hobbling economic growth further.

Anonymous said...

Whatever you might think about Berlusconi, he was democratically elected.
He went to the Italian people offering is well known character and personality plus political program, they accepted it and he won a plurality of votes.
Mario Monti - the man imposed on Italy by the French/German axis that runs Europe has never been elected and has never offered his political program to the Italian people.I'm sorry but this is not merely abrogating of the democratic process, but dictatorship pure and simple.The absolute, justifying excuse made by each and every dictator from Caesar right down to Hiyler, Castro, Gaddafi , Sadam Hussein etc etc is this "The country was in a complete f*cked-up mess.The elected politicians were incompetent and too weak to do anything about, I could see this happening and could not sit back and do nothing - some tough action was needed for the good of the people".
WE have seen the true face of the European Union in this crisis - and it's ugly.This coming from a polity that is never ever shy about lecturing and admonishing other dictatorships (look how they slag off Belarus's Lukashenko)
It's not just dictatorship - effectively Italy has been reduced to the satus of a German protectorate, just like the Republic of Salo.
The EU stinks to high heaven.Finally people other right-wing British Tories get it.

Christopher Paul said...

Firstly, wages over time rise in lockstep with inflation, so there's little to worry about here. -- Silver

That's cold comfort when 10% of Americans are out of work. Inflation also wreaks havoc with savings.

Count me with the anti-inflationists.

Dutch Boy said...

I don't think I will wet my hanky for people who loan money they have a reasonable expectation cannot be paid back.

Anonymous said...

Well, the Italians have not been much since the 5th century. The Greeks since the byzantine empire before the crusaders sack constaninople in 1204, well.

Anonymous said...

France and Germany - (but especially the former) were the big lenders to Greece.

The Italians prudently avoided all those funky new financial instruments and were more cautious and conservative. And heavily scoffed when they were so hugely profitable years back.

The Franco / German pressure on Italy is to take some of the pressure off Greece.

The Italian economic fundamentals are fairly healthy and no worse than they were these last decades - in fact they're a bit better. Unlike Greece, Italy is a major world exporter, has a sizable industrial base and most people own their homes and - surprisingly - SAVE a lot. Plus, though dwindling still has the buffer of families. (Not just Mafia, but real families).

(The healthiest part of the Italian economy is that a good 1/3 is under the table and doesn't figure on the statistics). That used to be bad, until governments got so absurdly rapacious.) But that's another story.

Now that the assassin world bankers (that's what Madgi Allam of baptized by the Pope fame called them) have bought off enough votes to make Berlusconi fall, the ex-Communist President Napolitano, has appointed Mario Monti, an Euro enthusiast, Money-man technocrat of the first order to take over.

But first he appointed him life-time senator. Just a couple of days ago!

Here is Monti on record saying, on TV, just last Sept. 26th:

..."Oggi stiamo assistendo al grande successo dell'euro e la manifestazione più concreta di questo successo è la Grecia, costretta a dare peso alla cultura della stabilità con cui sta trasformando se stessa"

(Today we are witnessing the great success of the Euro, and the most concrete manifestation of this success is Greece, forced as she is to give weight to the culture of stability through which she is transforming herself.)

So here you have it from Italy's next Prime Minister, a technocrat!

Why a technocrat and just recently appointed lifetime senator? No political responsibility. Whenever unpopular cuts and taxes need to be pushed (inheritance tax, property tax, gas hikes, etc.) the chickenshit politicians pass the hot potato to persons who either have no political future or will have one regardless of popularity.

The only cure against this rot is elections, with a real and unafraid politician taking responsibility.

Anonymous said...

Truth be told, Italy has a better and stronger industrial sector than the UK - so ultimately should prove more resilient than te UK.
Rather foolishly Britain junked most of its industry.Every month it posts a trade deficit of £10 billion or so.

Anonymous said...

Chris Paul,

That's cold comfort when 10% of Americans are out of work. Inflation also wreaks havoc with savings.

Welfare payments, like wages, also rise with inflation so those out of work aren't necessarily any worse off than they would have been in a low inflation environment.

Inflation only hurts savings if those savings aren't (or can't be) invested. Look at the data. 3-month T-bills beat inflation most years except the mid-late 70s, and even then savings were hardly "destroyed." And any erosion was more than made up for in the early 80s. Download the data for 3-month t-bills or 1-month CDs (both short term, liquid, virtually "risk-free" instruments) and then copy-paste a US inflation series side-by-side and you'll see what I mean at a glance. Hard to see how savers have been hurt here.


Even in good years the economy only grows about 1%. This is the result of deep structural problems that won't disappear any time soon. Poor growth ensures that Italy's already enormous debt will keep growing, hobbling economic growth further.

That's fair enough. But on the other hand there's only a small degree of difference (at least judging by the numbers) between conditions in Italy and conditions in countries like France and Germany. Put differently, there's a hardly a world of difference, such that their future is secure but Italy's is doomed.

I've grown to be very, very skeptical of predictions of doom or "collapse" (a favorite term in some parts). If you think back a decade it was Argentina that was being described as failing and collapsing. True enough, there was a very nasty and prolonged recession but look at the rebound that took place immediately afterwards: except for 2009, growth from 2003 to 2011 has been around 8% a year, which is almost Japan-in-the-70s-like. You might say Italy's a more "mature" economy, with less headroom to grow into, and I'd agree. But all the doom and gloom bandied about back then has made me very skeptical of pundits' forecasting abilities (and motives).

Also, on the "massive amounts of debt" thing. Lebanon's net debt was about 150% of GDP in the early 2000s (compared to Italy's 100% today) and reached 175% in 2006, but the economy nevertheless grew at a respectable clip until 2007 at which point the yearly gains posted were 7.5%, 9.3%, 8.5% and 7.5%. Lebanon largely side-stepped the financial crisis hence the exceptional 8.5% posted in 2009. That's pretty impressive. Again, the obvious rejoinder is that Lebanon is a developing country so there's no parallel with Italy. True. But it does make you wonder why if massive debt ensures a rich country will be "growing nowhere fast" it doesn't necessarily have the same effect on poorer countries.


Anonymous said...

Moronic commentator at Via Meade is hooked on PC:

"Krugman also demolishes the argument that Professor Mead and others frequently make; that generous social spending (what Mead calls the “blue state model”) is a recipe for insolvency and economic stagnation.
Perhaps the two nations with the most generous social safety nets in the world are Sweden and Denmark; it’s hard to think of “bluer” nations than these. Denmark’s debt as a percentage of GDP is 44 percent and Sweden’s is 40 percent."

But, look at the big picture. Social spending is or isn't a burden depending on the social context. Danes and Swedes are diligent, honest, trusting, relatively uncorrupt, pay taxes, and maintain social cohesion & unity. So, while people receive generous social benefits, they also generously pay into the system. It's give and take, not take and take. Under such conditions, generous social spending policies can work.

But Italy and Greece are different cultures. Greeks are famous for laziness, corruption, distrust, tax evasion, nepotism, and etc. Greeks demand generous social benefits but don't pay taxes into the system.
Also, while Swedish and Danish governments are reasonably meritocratic and hire talented people who work efficiently, Greek government has been run by incompetents and their cronies/relatives; needless to say, much of state funds are lost or stolen, which is why Greeks have had to keep borrowing from OTHER nations to fund their social spending.

Same goes for Italy. Corruption is rife, especially in the southern part. People avoid paying taxes due to culture of corruption and/or distrust of politicians and bureaucrats.
Some Northern Italians wanna break away because their wealth is drained to pay for the lazy bums in the South. So, there's less unity and goodwill among Italians than among the more homogeneous, disciplined, and trust-oriented Swedes, Germans, or Danes.

Same goes for America. Some blue state areas are prosperous and generous because most of the people are highly educated, disciplined, responsible, create wealth, and pay taxes. In such a community, lavish social spending is affordable since people give and take from the system.
And so, places like Seattle and Portland do pretty well even with generous social spending.

But take a place like Latino parts of LA, almost all of Detroit, south side of Chicago, black areas of Philadelphia. You have a lot of people who have kids out of wedlock, beat up teachers, rob and steal, listen to rap music all day, cheat any chance they get, and act like leeches and louts. They don't produce much wealth, they don't pay much in taxes, and they cause all sorts of social problems.
They take away far more than they add to the system. So, local governments run out of money and go into debt.
In blue state cities, the divide between whites and blacks--or between whites and Hispanics--can be just as striking as in the Deep South. Whites pay into the system, blacks take from the system.

Now, the facts stated above are forbidden because the culture of political correctness says it's 'racist' or 'xenophobic' to say that some peoples and cultures are more industrious, honest, trustworthy, and effecient than others. So, we are not supposed to note the differences in the 'national character' between Germans and Italians, or between American whites and American blacks.

Now, if Sweden or Denmark were to be flooded with huge waves of lazy Greeks, corrupt Southern Italians, or American blacks or Mexican illegals, their system would also go under.
Just look at California. When it had been a solidly white majority state, it produced so much wealth that it could afford generous social programs. But with so many third-rate immigrants from Mexico pushing productive whites out, it has become the most indebted and dysfunctional state in America.

Anonymous said...

The ones doing most of the work up North are the lazy bums from the south.

The Euro was a bad idea, period. The Greeks don't have to be as diligent and boring as the Germans, nor Southern Italians like the Finns who go by the shiploads to get drunk in Russia and eat out of the microwave. Each country should go back to having its own currency which reflects not only its work ethic, its bondage to machines and factories, but also LOCAL culture, history, religions, family values, etc.

There is a thing such as poverty in riches.

Now all of a sudden, ancient countries - some even glorious in their own ways, are treated like corporations. Wow! Greece failed!

No she didn't, the Euro failed and all the banks that dangled free money at them failed (unless - as is eminently possible - they had plans from the start to turn her into a servile state owned by the banks).

Just end the Euro, or leave it to those countries that have given up their cultures in favor of airport terminal societies. Neither France, Germany or even America for that matter, are countries that need to be emulated.

Yes even America with the biggest prison population in the world and 1 in 4 kids on foodstamps (despite a huge land blessed by God and more think tanks than you can shake a stick at.

What is this great economy? Who are these Americans who criticize the Greeks? They are the ones who shipped off all their industry and have kept wages to 1970 levels while forcing both fathers AND mothers to work... and despite a huge increase in productivity ran up gazillions in debt. It is the Anglo-American model of Finance Kapitalism that has turned local cafès into billion dollar franchises quoted on the stock market. The politicians themselves have become products, and are presented in jingles. They are the ones who looked on while they becames respectively Arabia and Mexico. They are the ones who forced their people to COMPETE against Chinese semi slave labor.

The fascination with Anglo-America as well as Scandinavia (which will fall apart unless they protect their ethnicity) MUST END.

Money money money.... and now everybody's poorer for it

Anonymous said...

If all countries repudiated their debts at the exact same time, what would happen?

Just asking.

Anonymous said...

ECB wants Italy to put up its gold for debt relief