Italy, "Safe Bonds", & Europe's Populist Fantasyland

Authored by Daniel Lacalle via,

The populist coalition in Italy has presented an “economic” program and a threat to the European Union that makes Greece look like a walk in the park.

Let us start with reality.

Italy’s economic problems are self-inflicted, not due to the Euro.

  • Italy has seen more governments since World War II than any other country in the European Union.

  • Governments of all colors have consistently promoted inefficient dinosaur “national champions” and state-owned semi-ministerial corporations at the expense of small and medium enterprises, competitiveness and growth.

  • Labor market rigidities remained, leaving high unemployment and differences between regions.

  • A perverse incentive financial system, where banks were incentivized to lend to obsolete and indebted state-owned companies in their disastrous empire-building acquisitions, inefficient municipalities, as well as finance bloated local and national government spending. This led to the highest Non-Performing Loan figure in Europe.

  • A nightmare legal system that makes it virtually impossible to repossess assets from bad debt, led non-performing loans through the roof and malinvestment to soar.

  • A thriving export and small enterprise ecosystem were constantly limited by taxation and bureaucracy. This made the thriving companies smaller and actively looking to set activities outside of Italy.

Because of this, government spending continued to rise well above revenues. As Italy -like Spain and Portugal- decided to penalize high-productivity sectors with rising taxes, revenues fell short, while expenditures continued to rise. Italy, like so many peripheral countries, created a massive “crowding out” effect of the public sector against the private. It is not a coincidence that most citizens in Italy, like Spain or Portugal, prefer to be civil servants than entrepreneurs.

It is no wonder that, while private companies managed to survive and improve “despite government”, debt and non-performing loans soared.

Now they blame the Euro. As if the same crowding out would not have happened outside.  The only difference is that outside the Euro the government would have destroyed savers and citizens through constant “competitive devaluations” that were the cause of the economic weaknesses of the past. Constant devaluations did not make Italy, Spain or Portugal more competitive, they made them perennially poor and perpetuated their imbalances.

What solutions do the populists offer? More of the same.

In a report called “Welcome to Fantasyland”, independent analyst Gianluca Codagnone of Fidentiis explains:

“Some of the statements are obscure. I mean literally, as 'back to pre-Maastricht spirit' (uh?), while some other statements imply options which are unconstitutional (17 and 18).  The debt repeal for €250bn which was in the first draft has been substituted by the demand that the Debt held by the ECB after QE is
not accounted for in the Debt/GDP ratio. The opt-out clause from the Euro, has been substituted by a
demand for a full renegotiation of EU treaties (fiscal compact, six pack, debt held at Euro-System, monetary policy and so on). But above all, the measures outlined would imply an additional deficit of some €130bn by 2020 and shoot the 2020 Deficit/GDP to 8%”.

Italy has shown that accepting the populist argument of non-existent austerity and allowing imbalances to increase in order to contain rising political backlash, has only created more demands for excess.

Italy has not seen any austerity. Just moderate budget control.

The nonexistent austerity has led to madness. Populist parties behave like those children who receive a treat if they stop behaving badly, they continue to misbehave because they think they will receive more candy.

The funny thing is that millions of Italians and Europeans think that their pensions, their public salaries and their healthcare would be maintained or increased by defaulting and leaving the euro.

There is not a single case in history in which a default and exit like that of Italy has not generated huge cuts. There is not a single case in which the welfare state has not been massively cut in real terms with the devaluation. Whoever thinks that is a great idea should review history.

More importantly, even if these measures are accepted by Europe, it will create a domino effect of squandering states doing the same, ultimately destroying the European Union in the next debt crisis.

Italy faces about 350 billion euros of debt maturities, more than 300billion non-performing loans and approximately 65 billion debt maturities in euros from the largest Italian companies, in the next six to eight years.

Effective default would mean the bankruptcy of the social security, pensions, the collapse of public salaries and savings (since the main defaulted-on would be the Italian savers). But the bankruptcy of the banking system and rises in bond yields would lead to the drying up of credit to companies and families, no matter how exporters they may be. Exiting the euro would be a massive huge devaluation and a domino of bankruptcies.

The problems of Italy -or Spain, or any other European nation- are not solved by destroying the country and the currency. In this scenario, it seems almost naive to me that the European Commission thinks that it is going to place “safe” bonds packaging government debt while the politicians think that the only solutions are default or excess.

The European Commission wants to bundle debt from several states in a “safe bond” through a structured product, the ESBie. No one thought of this before, of course (irony).

“Only private investors would share the risk and losses,” states the draft of the Commission. This new example of subprime shows that the European Commission does not understand that packaging German bonds with Greek bonds does not make Greece safer but Germany riskier.

Standard & Poor’s has already stated that it would not grant ESB the highest rating, which is what the European Commission wants and, at most, it would have the qualification of the worst quality bond of the senior tranche. The rating agencies have already made the mistake of giving unjustified credit ratings due to a supposed state guarantee (Freddie Mac and Fannie Mae, the largest mortgage originators were and are public).

ESBs (European Safe Bonds) are a new demonstration of how little Europe understands risk, markets and reality.

The program of the Italian coalition of extremists is the demonstration that populism is not contained by whitewashing it.


johngaltfla Golden Showers Thu, 05/31/2018 - 05:09 Permalink

When a country's 2 year bond trades with a +/- 100 bps swing DAILY, it's fucked. Don't believe me? Ask Argentina. The ECB is praying their imposition of political order works, but when it backfires, the capital flight out of Italy and the rest of the PIIGS plus exposed Eurozone banks will be mind-boggling. We may still see EU/USD parity this year the way those clowns are running things.

In reply to by Golden Showers

Tarzan JRobby Thu, 05/31/2018 - 06:24 Permalink

The ministry of Truth, would be the house of Propaganda

The affordable care act, well, it raised the price of care

The plunge protection team, a group orchestrating the plunge of all plunges!

This is why, the only money I put in the stock market, is money that is matched by my employer, and not a cent more then is matched,

except, just to be contrarian, I hold a few shares of SQQQ, because I know when things only go up, they will soon go straight down.

In reply to by JRobby

Dilluminati Thu, 05/31/2018 - 05:05 Permalink

300 billion non-performing loans

no need of any further arguments or analysis

the only question is: 

who takes the haircut?

who takes the haircut?

who takes the haircut?

The EU is a facade of NPL's now sold as a necessity

Lets see 300,000,000,000.00 divided by 60.6 million (population of Italy)

well no wonder they are rounding up the knives in Euroland and the banksters uniting behind Soros

who borrowed 300 billion and isn't paying the interest?

NPL = not paying the minimum due on the credit card.. so the cocksuckers sound all like to me.. 

their not paying their fucking credit cards and intend to solve that by importing more poor and uneducated people from 3rd world countries..

maybe another plan is better?

nahh ban the knives   

Each Euro in circulation should be required to have the amount of NPL's printed upon it when it was minted

Si Senior me wants the good money!   

The % seniority established at that benchmark with a shared currency, so later debtors are not all created and treated the same..

Only George Soros and his ill gotten loot stolen from victims of Nazis would support the destruction of the 1stA and 2ndA and support banksters such as this!

Keep in mind that here is the banksters apologist…

and here is the man in his own words..

8 minute mark...

You see how the Washington post only told a small part of that story?




8 minute mark...



BritBob Thu, 05/31/2018 - 05:07 Permalink

The Crazy EU- Gibraltar

MEPs and legal experts have claimed the veto over the territory’s future after Brexit would give Spain special status among EU nation, when they should be on an equal level.

The EU’s Brexit negotiating guidelines stated that the Brexit deal will not apply to Gibraltar without an “agreement between the kingdom of Spain and the UK”.

Experts have told the Telegraph that the veto could be illegal under EU law.

Spain's Gibraltar claim has NO legitimacy and YES would be illegal.

They've effectively signed the territory away 3x times!

Gibraltar – Spanish Myths and Agreements (single page):


oncemore1 Thu, 05/31/2018 - 05:25 Permalink

Author seems to be a kind of econoanalyst.

He does not understand, that importance of economy is very low.

And for Italians, it is even lower.

He does not understand italian way of life.

A blind guy describes the colors.

Apologist for Euro, Soros ' shill.

Grandad Grumps Thu, 05/31/2018 - 05:27 Permalink

Debt money and debt slavery are created out of thin air by technocrats who add no value to this world. They suck it dry for Satan. Populism is a legitimate way to fight back against Satan. Italy owes no debt to anyone, especially a corrupt bank.

Reptil Thu, 05/31/2018 - 05:28 Permalink

"The nonexistent austerity has led to madness. Populist parties behave like those children who receive a treat if they stop behaving badly, they continue to misbehave because they think they will receive more candy."

Jezus what a load of crap.
Austerity is completely unrelated to the mountian of debt. The debt wasn't created by a lack of austerity. The debt wasn't created by a lack of oligarchs sucking the corpses of social democracy in Europe dry.
It has been created by investment banks investing in their friends. And the EU knew about it.
Whistleblowers who warned about it were FIRED:
Marta Andreasen MEP pt.1 - Financial Fraud within the European Union

So then they tried to solve it by hushing everything up. And not recapitalizing. Just shut up. Let the ECB dig a bigger hole to throw this one in. Debt racking up south, positive balance sheet racking up in the North. Fine, they thought, this works, maybe we'll grow out of it. Or maybe not. They're awash in cash suddenly. Who cares the problem's not solved. What problem?

Austerity didn't cause this, and is not going to solve this either.
That any currency devaluation was paired with "huge cuts", is not evidence that huge cuts are necessary. I assume with "huge cuts" budget cuts in pensions, healthcare etc. was meant. But that doesn't make sense.
It just meant that the oligarchs see an opportunity to steal some money from the citizens when they change the currency signposts.
Don't believe the hype.

Let it Go Reptil Thu, 05/31/2018 - 07:19 Permalink

We would be far better off if the term austerity was replaced or renamed sustainable spending. An article that was published several months ago on Project Syndicate by James McCormack titled, "The Quiet Demise of Austerity" states the merits of austerity seem to have been forgotten just when it is needed again.

The article below argues that we should at all times conduct business and run our government with responsible controls on spending. If a government spends and runs its business in an austere way the issue of when to start cutting or tightening should never surface.

 http://Austerity Should Be Renamed Sustainable Spending1.html

In reply to by Reptil

Illusion1 Thu, 05/31/2018 - 06:05 Permalink

Heh, I have Italian citizenship and my family is always asking me why I don't go spend some time there. It's because of shit like this. I don't wanna be there when this shit show blows.

AndCounting Thu, 05/31/2018 - 06:06 Permalink

Millions of Europeans would once again begin flocking there for their vacations if Italy:

  • reset forex rate to become attractive as it once was (value competitive with southern Mediterranean destinations);
  • got rid of the infestations of 'cockroaches' blighting tourists attractions.

I'm so glad I took my youngsters touring the length and breadth of Italy for a whole summer before the standards plummeted and prices rocketed... Italy has so much to offer but has become a horrible dangerous, expensive slum :{










Let it Go Thu, 05/31/2018 - 06:29 Permalink

With Italy's bonds taking a hit and the country facing political turmoil it is clear this did not occur overnight. All in all, it might be fair to say Italy is a European debt bomb waiting to explode.

Much like what happened in Greece the situation is not sustainable and will not go away.

Italy has been held together only because of the direct intervention of the ECB which made over 102 billion euros of Italian bond purchases in 2011-2012 alone. The article below presents an overall look at how things got this bad.

 http://Italy Update - How Italy Got Into Its Current Mess.html

To Hell In A H… Thu, 05/31/2018 - 06:38 Permalink

Once you take race out of the equation, immigration and the multicultural argument, it is fully acknowledge by anybody with at least 9 synaptic pathways functioning, Italy is a socialist-communist madhouse. With a productive industrial North and a deprived South which has only been catching up over the last 2-3 decades. This forum at times is too distracted by race and immigration, to see the bigger and deeper picture regarding the state and nature of some of these European countries.

I went to Venice in the mid-90's and was shocked (by British standards) to see a communist party office and how the people think. What struck me with Venice was the average age of the locals. Venice maybe beautiful, but essentially it is a tourist/seaside town and the young leave early because their are no fucking jobs. The average age of the locals was around 48. There were hardly any youngsters apart from those working and the black Africans selling fake designer bags on the Rialto bridge, doing a roaring trade. There were also many Yugoslavs who fled the fighting and settled in Venice as their first port of call.

Italy is yoked in debt in can never pay back, their banks are bust and corruption within their business elite is rampant. Italy has always been a house of cards. Portugal is the same, but is bailed out by cheap African and Brazilian labour, plus a life-line by having a back-door straw to Brazil from historical holdings and sucking the teats of Anglo and Mozambique. Italy has no remnants of empire to help prop her up, so is doubly exposed. France and England would be even more fucked than Italy, if not for their overseas adventures of pillage. There is a direct correlation of which European countries are tanking quickest, by those with a former colonies to suck from and those with none.

I'll say it again, this forum denies and ignores the realities regarding who is on FREE SHIT! No Arabs, sand niggers, niggers, Caribbean, Muslims, or Latin american country could be carrying Italian levels of debt and their bond market and currency not be bleeding from the rectum. Italy has been privileged for decades. If South Africa practised Italian monetary and bond polices, this forum would ridicule ad-nauseam. When Italy does it, it gets almost a free pass. This forum is littered with hypocrites, with blind spots. Italy is financially dead by any definition and this reality should be reflected in the price of the Euro. But the euro wont suffer. that only happens to the non-privileged nations and the dark skinned. 

AntiLeMaire To Hell In A H… Thu, 05/31/2018 - 07:26 Permalink

Agree on the financial situation of Italy, but why should EURO suffer? Even at the time of their entry their addition of their currency, the Lira, was valuable at 0 NPV. So as they brought very little of value when going in they shouldn't get much when going out.
Kicking them out of Euro system will save the Euro and will not really help them, but their population think it will, so give it too them ( :) evil grin).

The only reason for inclusion of Greece and Italy was because France wanted them included, so that they had a Southern block at their back and could continue more deficit spending. And Germany acquiesced because of the reunification...

No one to the North or East of the Rhine wanted the inclusion of all those Southerners (certainly not Greece, most also not Italy). Or even anyone North of the Alps :).


In reply to by To Hell In A H…

To Hell In A H… AntiLeMaire Thu, 05/31/2018 - 07:59 Permalink

The PIIGS were useless to the European project. Basketcase economies, socialist, spent more than they generated in taxes, high tax regions and apart from Italy, do not manufacture shit worth having, unless a company from another country relocated their. None of the PIIGS should have been allowed to join, but it was all about markets and making them feel wanted.

In reply to by AntiLeMaire

MusicIsYou Thu, 05/31/2018 - 06:43 Permalink

Bonds are safe because elites define the meaning of bonds from out of the clear blue sky,  bonds can be whatever they want. All they have to do is change the dynamics of what a bond is and make everybody conform.  That's what they've done from the beginning anyway. It's not as if the bottom is going to fall out of the global financial system because all they have to do is change the dynamic meaning of it as usual. I mean it's not as if there were billions of bonds on earth,  and then one day people multiplied on earth and learned how to use all the bonds laying around. 

ipso_facto Thu, 05/31/2018 - 09:01 Permalink

'There is not a single case in which the welfare state has not been massively cut in real terms with the devaluation.'

But 'the people' will still receive the same amount from the state (but it just won't buy as much.)  Then 'rich capitalists' will be blamed.