Global Macro
Italy: Delicate Political Terrain
August 6th 2013
Berlusconi blustered, but backed away from the political edge.
Now Letta must act and undertake rigorous, real reform.
Spread over Bunds currently comfortable at +259 bps.
Backsliding or political playmaking…spreads shoot over 300bps.
This past week saw the former Italian Prime Minister, and Europe’s most colourful political character,
Silvio Berlusconi convicted on charges of “Tax Evasion”. He is still appealing against a seven year
sentence for abuse of office and paying for a sexual excursion with an underage prostitute. Add to
that an investigation the bribing of a Senator and one might think that the influence of such a
character had completely faded away.
Not so, for on Friday, August 2nd 2013 “Il Messaggero” described the situation as a:
“…political earthquake of incalculable magnitude…”
Of course as the dominant media tycoon within Italy Mr Berlusconi is able to command air time as no
other can and he had, on Friday threatened to bring down the fragile coalition government led by
Prime Minister Enrico Letta. As August began so Mr Berlusconi suggested that the Prime Minister place
justice reform high on its political agenda or else he would withdraw his party’s (People of Liberty, PdL)
political support.
However, as Figures 1, 2, 3 and 4 show (next page) there was no desperate plunge in the value of
Italian assets. No widening of bond or credit default swap spreads. It is as if the market is now so used
to the stamping of the former Prime minister’s feet that one does not pay him too much heed. After all,
Berlusconi believes that Italians love him and he would hate to suffer their wrath if he were
remembered as the wrecking ball that harmed Italy whilst it stumbles over delicate political terrain.
It appears as if he has bowed to common sense as he knows that currently he is seen as little more
than a convicted criminal for offences committed in 2002-2003 when he held office.
Stephen Pope ~ Managing Partner ~ Spotlight Ideas
Tel: ++44 (0)1255 863612 Cell: ++44 (0) 7931 543 740
e: [email protected] e: [email protected] www.spotlightideas.net
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Global Macro
Italy: Delicate Political Terrain
August 6th 2013
Italy CDS (bps)
Figure 1: Italian 10 Year BTP Yield, Figure 2: Italian CDS,
Figure 3: Italy : Germany 10 Year Spread, Figure 4: Key Eurozone Equity Indices
Source: Bloomberg, CNBC Reuters
The charts show that the yield and spread of the Italian 10 Year BTP has been declining steadily since
OMT was mooted in September 2012. Similarly if we base t the indices from the four leading Eurozone
economies at 100 on December 30th 2011 we see that on August 2nd the DAX was at 142.53, CAC 40
128.03, FTSE MIB 111.20 and IBEX 100.09.
Political turbulence takes a summer break:
As the European lazy month of August has commenced we see that the threat of an Italian political
crisis amid a government collapse has receded.
The concern that followed Mr Berlusconi’s conviction that could have sent shudders throw the Italian
economy when it needs remedial action and reform appears to have been averted for now. However,
do not for one moment believe the crisis has gone for good. The political landscape is pliable and the
situation remains combustible; like forest floor tinder, ready to ignite again following the summer break.
Stephen Pope ~ Managing Partner ~ Spotlight Ideas
Tel: ++44 (0)1255 863612 Cell: ++44 (0) 7931 543 740
e: [email protected] e: [email protected] www.spotlightideas.net
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Global Macro
Italy: Delicate Political Terrain
August 6th 2013
Look again at Figure 3. It closed on Friday at 263bps and narrowed on Monday to 259bps. However,
the upside risk in a post summer political tumult could easily see the next levels on a Fibonacci
retracement edge higher away from the low of the range; stretching to 23.6% at +313bps and 38.2% at
354bps.
A call for calm:
Prime Minister Letta appealed on Monday to the coalition parties to avoid a damaging political crisis.
"…We are beginning to see signs of recovery, but this needs stability, and that requires responsible
behaviour from everyone…An early election under the present electoral law would produce instability
and fragmentation…”
However, can we be sure that Letta's government will use this summer lull in the political tension
effectively? We cannot! August is a slow month where many public authorities are barely functioning
and reform is not aided by the glacial pace of the justice system or parliament’s summer recess.
Forward with reform…they can be no retreat:
The ministers in the Italian government have much to do and they must start by being more vigorous
than Mario Monti was with tax reform. There is no time to be a shrinking violet and fret over the
psychological impact on consumer spending of the government's efforts to stamp out tax evasion.
The message has to be clear in that if companies and individuals declare their income correctly they
can feel safe that they will not be under suspicion. However, it goes deeper than just being efficient
and effective in measuring and collecting tax revenue. The government itself has to become even
more cautious and practice good housekeeping in how it commits to spend public funds.
The European Commission in Brussels is concerned as to the effectiveness and efficiency of much of
Italian public spending. It has the support of the employers’ organisation Confindustria. This body has
repeatedly questioned why the state is incapable of constructing a budget that replicates how
businesses and households do and therefore live within its means.
Of course the “Austerity versus Stimulus” debate has been long raging and it rages still but look at the
political dimension. The unions reject austerity and the unions are strong in the public sector. The
biggest unions have historic links with the centre-left Democratic Party (PD). This stymie’s bureaucratic
reform and deregulation. This serves as a drain on the public purse and places greater pressure to raise
taxes on corporations and the wealthy that tend to back Berlusconi's People of Freedom (PdL).
Italy risks an autumn where the confrontation between PD and PdL risks seeing Italy career of the
path of reform and progress and tumble into a vortex of taxes, recession and deeper deficits.
Stephen Pope ~ Managing Partner ~ Spotlight Ideas
Tel: ++44 (0)1255 863612 Cell: ++44 (0) 7931 543 740
e: [email protected] e: [email protected] www.spotlightideas.net
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Global Macro
Italy: Delicate Political Terrain
August 6th 2013
Of course, the reader may at this point suggest Spotlight is just replaying an old record? The sad
truth about Italy is that this has been the case since before it was shoe-horned into the Euro.
Taxes and public spending have surged even when GDP has been flat lining or even receding.
Italy remains the most challenged of Europe’s three major economies and can easily be
dismissed as a nation in denial of its economic realities. Certainly one wonders how low the high
level of Debt: GDP can be sustained, Figure 5.
Figure 5: Debt: GDP (%)
Source: Eurostat
The difficulty appears to be the lack of credible, secure leadership across the political spectrum,
and an ability to communicate objectively and effectively the realities and challenges of
globalization. This is quite curious as many of Italy’s largest multinationals are world class
operators and have displayed an incredible adroitness at adapting to globalization. However,
small and medium size companies, (SME’s) are failing to get access to capital and finding it
increasingly difficult to compete within Europe and the world.
The provision of generous state benefits and entitlements has been a hallmark of Italy for many
decades and to undertake a serious reduction to what is considered a public benefit and
expectation will be extremely difficult, if not impossible to implement. To press ahead on such a
course will require courage on behalf of the political class but also demand a cultural
reorientation in Italy where state largesse prevails and is woven into the fabric of society.
Italy still has limited time where it can be the master of its own destiny. The markets may be
sleepy in August but they are still alert to the opportunity that will arise if action is delayed.
Spreads could easily shoot higher to crisis levels on perceived inertia or imminent political
collapse so forcing Italy to face change from a point of panic and weakness amid stressed and
more severe conditions.
Stephen Pope ~ Managing Partner ~ Spotlight Ideas
Tel: ++44 (0)1255 863612 Cell: ++44 (0) 7931 543 740
e: [email protected] e: [email protected] www.spotlightideas.net
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Global Macro
Italy: Delicate Political Terrain
August 6th 2013
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Stephen Pope ~ Managing Partner ~ Spotlight Ideas
Tel: ++44 (0)1255 863612 Cell: ++44 (0) 7931 543 740
e: [email protected] e: [email protected] www.spotlightideas.net
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