Brace Yourself For Italy's Bankruptcy

Tyler Durden's picture

Submitted by John Mauldin via,

When Charles Gave, paterfamilias of Gavekal, chooses to express displeasure over an economic trend, an asset class, or what have you, he does not exactly mince words. If you happen to be in the room when he does so, he can sound like the Voice of God Himself, declaring from on high. And with his longish flowing white hair, he actually looks like central casting setting over to play the part.

Today Charles is exercised about Italy. He first reminds us that when Italy adopted the euro in 1999, he had argued that Italy would change from being an economy with a high probability of many currency devaluations to one with the certain probability of eventual bankruptcy. Now, he says, the fateful moment is not far off.

He gives us a couple of before-and-after charts: before March 1999 and from March 1999 to the present, in which he compares Italian and German industrial production and the performance of their respective stock markets. He notes that from 1979 to 1998, Italian industrial production outpaced Germany’s by more than 10%, and Italian equities outperformed German equivalents by 16%. That’s after taking into account the devaluations. Northern Italy is actually a production powerhouse, or was…

Then came the euro. Since 1999 Italian stocks have underperformed German stock by 65%, and since 2003 Italian factory output has lagged Germany’s by 40%. Thus, summarizes Charles, in this short essay,

The diagnosis is simply that Italy has become woefully uncompetitive, and as a result, is not solvent. This much is clear from the perilous state of its banking system, which is always the outcome when banks lend to firms that have been rendered uncompetitive by some reckless central banker...,


This has to be the most well-telegraphed, and now inevitable, national bankruptcy that I have seen in my 45-year career.

Putting the Boot into Italy

By Charles Gave

Matteo Renzi has joined a long line of Italian prime ministers who failed to “reform” their country. This is another way of saying that he could not wave a magic wand and make Italy competitive with Germany. The grim reality is that no Italian leader stood a chance of changing their country once the fateful decision was made to peg its currency to Germany’s. At the time of the euro’s launch in 1999, I argued that the risk profile of Italy would change from being an economy where there was a high probability of many currency devaluations to the certain probability of eventual bankruptcy. Sadly, that moment is not so far away.

The chart below tells the story of Italy’s recent economic history in two parts, namely, (i) March 1979 to March 1999, and (ii) March 1999 to the present. Italy joined the Exchange Rate Mechanism in 1979 at 443 lira per deutschemark, yet by 1990 frequent devaluations meant that rate had slid to about 750 lira. By the early 1990s, the Bundesbank was overseeing a newly unified German monetary system and in order to fight inflation it had driven real interest rates to 7%. By September 1992 the stresses on the system caused the UK, Sweden and Italy to exit the ERM, which meant another huge currency devaluation, pushing the lira as low as 1250 against the deutschemark, but delivering a huge tourist boom to boot.

Italy's Bankruptcy


Still, from 1979 to 1998 Italian industrial production outpaced that of Germany by more than 10%, while Italian equities outperformed German equivalents by 16% (this indicates that Italian firms were earning a higher return on invested capital than those in Germany).

Then came the euro. By 2003 it was clear that Italy was uncompetitive and subsequently, Italian equities have underperformed German equities by -65%, reversing the previous half century’s pattern when Italian equities outperformed on a total return basis. Similarly, since 2003 Italian factory output has lagged Germany’s by 40%.

The diagnosis is simply that Italy has become woefully uncompetitive, and as a result, is not solvent. This much is clear from the perilous state of its banking system, which is always the outcome when banks lend to firms that have been rendered uncompetitive by some reckless central banker. Short of imposing Greek-style slavery on Italy, there is not much hope of solving the problem, but I rather doubt that the Italian electorate will be as patient as its neighbours across the Ionian sea.

As such, the relationship between Italy and Germany is radically different from that in the 1945-99 era when a natural return toward equilibrium was achieved through exchange rates adjustments. The only possibility on the current trajectory is that the Italian and German economies keep diverging, which is why a “normal” resolution cannot be achieved.

Hence, an Italian sovereign default of some variety is now a near certainty. While a central bank can address a liquidity problem, it cannot fix a solvency issue, especially one as large as Italy’s. The only remedial action that can now be taken is to throw good money after bad, which is exactly what I expect Mario Draghi to do, especially as he played such a key facilitators’ role in getting Italy into the euro system in the first place. Such actions – possibly to be announced on Thursday at the European Central Bank’s policy setting meeting – can of course merely postpone the day of reckoning, but will solve absolutely nothing.

The rational approach for investors is to shun Italian financial assets such as bank equities or government bonds until such time as exchange rates are once again market determined prices. This has to be the most well-telegraphed, and now inevitable, national bankruptcy that I have seen in my 45-year career. There is no reason to be dragged under the steam roller as there are many other markets and assets to play in.

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Every week, celebrated economic commentator John Mauldin highlights a well-researched, controversial essay from a fellow economic expert. Whether you find them inspiring, upsetting, or outrageous… they’ll all make you think Outside the Box. Get the newsletter free in your inbox every Wednesday.

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NugginFuts's picture

How many more snowflake economies will it take to start the avalanche?

Troy Ounce's picture


Greece, Italy, Spain, Portugal, France.....

Rock & Roll. Bring it on!

Draybin Deffercon III's picture
Draybin Deffercon III (not verified) Troy Ounce Dec 20, 2016 12:49 PM

Teh world is ending oh noes! Buy STOXX!

USisCorrupt's picture

Rudy Giuliani BLOWS Pizzagate WIDE OPEN, today Dec 20th !


yogibear's picture

Whee! Buy stocks!!!!
Only way is for Wall Street is to push stocks higher!!!!

JRobby's picture

The EU and ECB was designed to cause several member nations to collapse due to existing economic disparities at the time it was implemented. All debt issued in Euros so now catch up and raise taxes to keep up.

The bankster overlords must be enriched through inflation, interest and restructurings.

In Greece's case, add Goldman to the mix (some payoffs were made clearly) and get a fist fuck on a national level.

The Saint's picture
The Saint (not verified) JRobby Dec 20, 2016 2:51 PM

What ever happened to the Deutch Bank collapse?  It still hasn't happened.


froze25's picture

@USisCorrupt , this is a fake twitter account.

Ghordius's picture

as rubbish as the article and Krugman's rubbish on the EUR

phaedrus1952's picture

Might put new perspective on Kay Griggs' lengthy interview in 1998 describing, in a confessional to her pastor, the extraordinary pervasiveness of pedophilia and blackmail that her Marine Corp colonel husband and his military/governmental  associates were involved in.

bob_bichen's picture
bob_bichen (not verified) Troy Ounce Dec 20, 2016 12:56 PM

Europe has its F-PIIGS (France-Portugal,Italy,Ireland,Greece,Spain).


Well, we all know America is Exceptional and we have

Our American PRICKs (Puerto Rico, Illinois, Connecticut, Kentucky)

Amalgamated Tang's picture

Surely you mean, California?

Puerto Rico, Illinois, California, Kentucky

phaedrus1952's picture

Not to threadjack, but Giuliani's tweets yesterday on Pizzagate, and his one page manifesto -if genuine (seems like it), could blow everything sky high. Voat is running with it.

Innominate's picture

Link? The only Giuliani twitter account I can find hasn't had any activity since early December.

yogibear's picture

Then to DOW 25,000!

Keep pushing up the indexes with no downside!

Soul Glow's picture

They will declare a bailout and stocks will go up, real estate prices will go up, and the gap between the rich and poor will continue to widen.  So who really cares?

Cursive's picture

Years ago, this would have sounded like sarcasm, but today it seems like a level-headed prediction of what will surely happen.

adonisdemilo's picture

Lira, here we come.

I hate to use a phrase from Victoria Hoodlum , because she's a dozy bitch, but, "fuck the EU"

Van G's picture

Italy is going down. It will have a similar effect that the Greece wash out did on the US and other markets (I am in Singapore). But there are going to be other factors. The US will be more severely effected, but it will not all be because of Italy. 

Dark Daze's picture
Dark Daze (not verified) adonisdemilo Dec 20, 2016 3:09 PM

Greece, Italy, Spain are all sideshows. Japan and China are the main attraction. I hope every fucking 'leader' in the world watches what happens very, very closely. Their hubris and unshakeable belief in themselves is about to blow up.


Italy is the most corrupt country in the world so it is fitting that they will be the first to implode across the board. The Mafia(tm) was behind the deregulatory move away from Glass-Steagall, and they were behind the rigged markets because they are the specialists when it comes to fraud on mainstreet, and in the casino binezz. Clearly, it will be a modern day miracle when all their banks implode and the Italian people rape & pillage Rome and the Vatican of all their gold holdings.


Pope Ponzi will wish he was a poor beggar living under a bridge after the people take a pound of flesh off his life in the very near future. Goodbye, Rome!!!

south40_dreams's picture

Does this mean I will finally be able to afford that Lamborghini?

syzygysus's picture

Maybe, but it also means the price of PIZZA goes up.

sinbad2's picture

Sorry to disappoint you but the Germans now make Lambo's. The old Italian Lambo's had really bad build quality. the paint would oxidize in a couple of years, the above your head switches would fall down and hang by the wiring, the clutch(Miura) wasn't really big enough. 

I used to work on a lot of exotic cars, and my pick of Italian cars were the early 60's Ferraris and Maseratis.

But if you want a supercar you can drive everyday, Porsche or Mercedes.

lasvegaspersona's picture

At heart the Italians know the pain of repeated devaluations and do not want to go through them again.

They also collectively lack the discipline to live within their means (like almost everyone else.)

They can't have both and now will suffer as the entire current dollar based system is revealed to be a really poor way to save....shoulda bought gold...

Bemused Observer's picture

I think it's a bit misleading to say these countries, or people, are 'living beyond their means', and gives a false impression of a free-wheeling populace voting themselves bennies irresponsibly. The fact that they DO make the payments on these debts shows me they HAVE the means, they are just fucking up the timing by borrowing from others to have it right NOW instead of waiting a bit. Then the debt payments take up so much current income that other things start to suffer, and so on.

But they HAVE the means, they can DO most of the things they'd like, they just have to plan, save and do it the right way, instead of borrowing to get some kind of a 'jump start' that never actually works to jump start anything except debt peonage.

It's more a problem with lack of patience than with lack of means. Also, an ego-thing, as most leaders want to see the results quickly and under their name instead of initiating a process their successors will carry on to completion. So, it is the "I want it NOW, and I want credit for it" mentality that causes them to borrow unnecessarily...not any actual NEED for such borrowing.

Like I can plan a big vacation for next year, and put the funds aside over the coming months. Or I can say, "Why wait?", and borrow the money so I can go next week instead. Now if I did that, the payments would crimp my future life, but it's not because I couldn't afford the vacay in the first place, just that I was impatient and impulsive and dug myself into a nice little hole trying to have it right this minute instead of, God forbid, having to WAIT...

This mentality, by the way, is at the root of nearly ALL our current problems. Go ahead, take a look at any issue we face'll find some asshole behind the scenes, rushing through something, focused only on immediate return regardless of future cost. Then, when the asshole fucks up, and loses a whole bunch of your money, he and his friends will bitch about you 'living beyond your means' as the reason for the loss. When in fact you DID have the funds to do the thing, what you didn't count on was the interest bearing fees the asshole was going to charge you for fucking it all up, or the costs of fixing the damage he caused.

I mention this because the 'living beyond your means' thing has been mis-used against a lot of people who don't deserve it, usually with a hefty dose of moral condemnation. They HAD the means, but big finance imposed a lot of costs they were never told about in exchange for doing it their way. Now they are stuck with the bill, which is cutting back on the ability to finance day-to-day life. A big price to pay for whatever 'convenience' was achieved in doing things the 'Wall Street way'.

The financial industry has convinced too many people that it is VITAL to a functioning economy, when nothing could be farther from the truth. They are pure parasites, and do nothing but drain resources from legitimate transactions. Then, when their host dares complain bout all the extra drainage, they have the balls to blame the host for putting too much demand on the blood supply!

OverTheHedge's picture

When did you last have a say in government financing? When you last voted? Your choice was big debt or bigger debt, because that's all they know. And what about the exponential debt creation that is REQUIRED to keep our system running? We are just on the runaway vertical point on the curve; the system will reset, and we will start again, only much poorer. Excel a few, who will own nearly everything.....

JPMorgan's picture

Bankruptcy is awesome news, stock market all time highs coming right up. :S


Bam_Man's picture

I wll go out on a limb here and say that JAPAN will be the "Black Swan" of 2017.

They no longer have a functioning Bond market, with a national debt in excess of 1 QUADRILLION Yen (USD $9 TRILLION).

I say it goes "BANG!" in 2017.

Italy will be a mere sideshow.

FinanceNewb's picture

i will counter your prediction with my own...

A large earthquake will hit Italy very soon (check out Dutchsinse or BPEarthWatch on youtube).  This will cause the italian insurance companies to go belly up and will start the whole chain...

Bam_Man's picture

The Italian insurance companies are probably "belly up" already.

They just won't let anyone know.

FinanceNewb's picture

Right but this will make it "un-hideable"

RSDallas's picture

I never thought Europe could stay above water this long. This explains The Donalds cabinet picks.  They are all skillful debt traders and bankruptcy specialist to some drgree.  

Reichstag Fire Dept.'s picture

I expect they will suppress the gold price to a massive extent to make sure their newly printed money will have at least some value...

I'm a net seller but looking for a bottom to stack see more.


Doppelganger71's picture

Love your handle "Reichstag Fire Dept." lol.......................

Hanomy's picture

Please visit;   read it, download it, spread the word.  I believe it is the real solution to the current social, financial, political systems.  To transition from the current systems to HANOMY will take just few short years.  Hanomy turns the concept of money upside down.  It has lots of number crunching and it works as you will see.  Please make it goes viral so people aware that there is a sounded alternative and that we won’t be forced into another elites’ designed system.  All the steps to implement Hanomy are in the manifesto.  Hanomy can becomes a worldwide movement, people from around the world can flood streets worldwide and demand Hanomy, say on Feb 14.  Nations will come together and discuss because the citizens demand it.   Elites can still participate in the system, they just have to earn money, respects and power the honestly and productively.  I have tried to contact many alternative media all week last week, no result.  I need help to make it go viral.  We don’t have much time left.  The clock is ticking!.

Itgoestoeleven's picture

Hanony=statist bullshit


Bubbette's picture

Innuendo=Italian for Preparation-H

cat2005's picture

I visited and will give my opinion for what it is worth: It has noble goals and I agree with nearly all of them but your website needs serious work. First you should better explain the name "Hamony" or however you say it. Second you should explain how you want to achieve those goals. Just listing a bunch of goals means nothing. Shit, I could do that. Tell us how (i.e. what policy changes) you want in order to achieve those goals. Otherwise your website wastes my time and your urge to spread it just turns people off.

Your website needs a better introduction to your points, methods, etc. Leave the pdf for those wanting more details. Your prime task is to hook new people in the first few seconds of seeing your webpage. Do that forst then direct them to the pdf for more details. Perhaps your webpage could have a 1 page summary of each point to act as your lure?

VWAndy's picture

 Id be suprized if any government was actually solvent. Thats why they all like the fiat magic. Its what powers the gravy train. That and the corruption and these goverments ability to use force on thier own people.