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Dragi and Italy

Marc To Market's picture




 

A key issue that will be addressed this week is how will the ECB respond to the electoral outcome of Italy.

The outcome of the Italian election is not yet really known in the sense of the composition of the next government. There seems to be two potential paths going forward. The first was floated over the weekend of another technocrat government.

The name of the Italy's central bank governor, who succeeded Draghi in late 2011, Visco has suggested to replace Monti as the technocrat PM.  There does not seem to be much support for this course, but may have been proposed to encourage a political solution.

Indeed the shape of a potential political solution is crystallizing.  In effect, the senators elected under Grillo's 5-Star  Movement would abstain in a confidence vote, making it easier to secure a majority.  The 5-Star movement would support individual government measures that would include a limited agenda:  electoral reform, some provide some relief from austerity and the selection of a new president as Napolitano's term ended in mid-May.   

It appears that Grillo and the center-left could agree to new elections in around six months, in which case it would be interesting to see whether they are before or after the German elections slated for late September. There is much jockeying for position currently in the media as well as within the parties/movements.  Bersani meets with his party leadership in the middle of the week.   A move to bring into the Renzi, the mayor of Florence who lost to Bersani in a leadership challenge last year may help reinvigorate the base, which was disappointed in Bresani's weak campaign in which he seemed to snatch defeat from the jaws of victory, seeing a substantial lead all but disappear. 

Today and tomorrow Grillo will meet with the 165 lawmakers that were elected under his banner.  It is not clear the extent of party discipline or the extent Grillo can negotiate on their behalf.  Besides some political reforms, like term-limits, and conditional euro skepticism (if there is not a change), the 5-Star Movement's concrete, positive program is not obvious.  The idea of renegotiating Italy debt that has been floated is not very helpful insofar as the largest owners of Italian debt are Italian banks, other financial institutions and households.  If it was largely in foreign hands, it could be a different story.  Italy is the only euro area country running a primary budget surplus. 

Given the continued contraction of the Italian economy and the large protest vote against continued austerity, it is possible that a new government would find some modest way to offer economic stimulus.  Ultimately, Italy's problem is not its deficit, which is among the smallest in the euro area after Germany, and not really its debt, which while high is fairly stable.  Instead it is the continued loss of competitiveness, illustrated by high and rising unit labor costs. 

That brings us to the ECB.  A Reuters poll out last week found that 44 of 55 economists surveyed see Italy's election results increasing the likelihood that the ECB's Outright Market Transaction facility is activated.  Twenty two thought it would be triggered by Spain and 18 thought Italy.  A few thought Portugal or Ireland.  Meanwhile, a growing number, though still a minority expect the ECB to cut rates later this year (22 of 76 vs 18 of 76 in January).   However, a large majority (90%) do not expect a cut this week.  

The ECB will update its staff forecasts and, given the recent string of data, including forward looking indicators such as orders, it seems reasonable to expect the revisions to anticipate weaker growth and lower price pressures.  A more pessimistic outlook would be a necessary even if not sufficient condition to lead to a rate cut in Q2.  That said, with the EONIA below 6 bp, it is difficult to envisage the impact of a rate cut, where the zero deposit rate is the key rather than the 75 bp repo rate.  Although ECB officials have indicated they are technically prepared, a move to a negative deposit rate is seen as likely to be more disruptive than constructive.

Separately, we note that Fitch's report on holdings of US money markets (with a one-month lag) showed that at the end of January, the top 10 held the highest level of euro area paper since Oct 2011 at 14.5%. The peak was in May 2011 near 30%.  In dollar terms, the January reading reflected a 90% increase since the low point in mid-2012. US money markets had become less risk averse as they seemed to be more willing to hold unsecured debt and long-duration paper.  Of interest, two of the largest single bank exposures, Fitch found, were Japanese banks, Mitsubishi and Sumitomo.   Earlier today, Fitch upgraded the viability ratings (VR) of several large Japanese banks, including these two.  It is thought to reflect improvement in the ability of institutions to absorb shocks.

 

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Tue, 03/05/2013 - 13:26 | 3301211 pashley1411
pashley1411's picture

Italy is a moocher-republic; a string of retrograde backwaters, living off of and paid for by industrial Lombardy and Piedmont, who, inexplicably, allow Rome to keep the circus going.

The backwaters are not interested in the efficient use of capital and labor; they are interested in the efficient distribution of connections and patronage.    They love the EU, for the same reason and in the same way as do the other EU-member governments.  

5 Star is simply the latest expression of the producers trying to free themselves from the moochers, found everywhere and in some form every country.  Good luck.

Mon, 03/04/2013 - 22:46 | 3299759 max2205
max2205's picture

We are popeless...popeless

Mon, 03/04/2013 - 21:04 | 3299526 WTFUD
WTFUD's picture

Not only should Italy leave the EU but also the north and south of the country should divide! All that needs to happen is for them to rid themselves of the bankers and begin bartering on both sides of the divide!
The problem is not italy or usa or mars it is fucking Banks. Stop this propoganda and BS regarding labour or competitive cost. Banks and Mafia = Banksters

Mon, 03/04/2013 - 17:28 | 3298965 Vegetius
Vegetius's picture

Beppe needs to start reading Lenin, Hitler or Robespierre on how to forment a revolution, cause it is not going to work the way he is going. The elite are struggling to undermine him and if he is not willing to get ugly with them they will eat him alive.

If virtue be the spring of a popular government in times of peace, the spring of that government during a revolution is virtue combined with terror: virtue, without which terror is destructive; terror, without which virtue is impotent. Terror is only justice prompt, severe and inflexible; it is then an emanation of virtue; it is less a distinct principle than a natural consequence of the general principle of democracy, applied to the most pressing wants of the country … The government in a revolution is the despotism of liberty against tyranny.

Maximilien François Marie Isidore de Robespierre
February 5, 1794
Report on the Principles of Political Morality

So in short Beppe you better get your warface on.

Mon, 03/04/2013 - 15:56 | 3298620 disabledvet
disabledvet's picture

Interestingly...and I think VERY importantly "there will be a new Pope" as well.

Mon, 03/04/2013 - 13:15 | 3298113 Nobody For President
Nobody For President's picture

Dont ya just love a sentence that starts: That brings us to the ECB.  A Reuters poll out last week found that 44 of 55 economists surveyed see../

 

44 of 55 economists can kiss my ass...

So can the other 11.

You go Beppe - get that referendum on the agenda and watch the bankers squirm and squeal.

Mon, 03/04/2013 - 12:42 | 3298002 Orly
Orly's picture

There was a rumour that S&P would downgrade Italy later today.

How would this affect the Italians requesting the OTM and what does that do to your outline of ECB policy?

:D

Mon, 03/04/2013 - 15:27 | 3298531 Marc To Market
Marc To Market's picture

I head a slightly different rumor.  Among the main rating agencies, Fitch is the outlier with an A- rating.  S&P is in the middle with a BBB+ rating.  Moody's is the weakest at the equivalent of BBB. 

Also recall that a formal request is the first step, but there are other requirements such as an EU program.  Italy, as I treid to argue, does not have a deficit problem, and even its debt is stable, though high.  The problem is the lack of growth.  OMT does not address that problem.  Italy needs a government that can request it.  It does not seem that a technocrat government has sufficient authority.   I hope this helps your own thinking. 

Tue, 03/05/2013 - 03:33 | 3299064 Ghordius
Ghordius's picture

- del - good article

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