In Between Days: Italian Dressing

by CC November 7, 2011 11:57 pm • Commentary


Italy’s PM Silvio Berlusconi is set to face a crucial vote on the budget, amid fears that Italy could be the next victim of the Eurozone debt crisis.

Borrowing costs for Italy’s government have soared because of fears it may be unable to repay its huge debts.

On Monday, Mr Berlusconi, who has survived dozens of confidence votes during his tenure, dismissed reports he planned to resign.

Meanwhile, European finance ministers are due meet in Brussels for talks.

Concerns over Italy are overshadowing developments in Greece, where political leaders are wrangling over the formation of a new unity government to impose austerity measures in return for international loans.

Italian 10-year bond yields rose to a euro-era high of 6.67%, with markets viewing Italy’s ability to repay its debt as increasingly doubtful.

While Italy’s deficit is relatively low, investors are concerned that the combination of Italy’s low growth rate and 1.9tn euro ($2.6tn) debt could make it the next to fall in the Eurozone debt crisis.

On Monday, Mr Berlusconi denied on Facebook reports that he was about to resign.

Stock markets across Europe bounced up on the chance of the Italian premier’s departure but returned to negative territory at Monday’s close.

Business Insider

First, a key budget vote:

Tomorrow, or on Wednesday at the latest, the government will vote in the Lower House on the so- called “Rendiconto di Stato” (Article 1 of the 2010 budget account, over which the government lost a parliamentary vote on 12 October 2011). It will be a tough test, given that Mr Berlusconi‟s majority is getting thinner. It currently stands at around 314, 2 votes below the 316 necessary to pass the bill. However, there are around 15 MPs who have not yet decided how they will vote, so the vote hinges upon them.

If Berlusconi can’t get the votes, then he’ll call a confidence vote. If he loses the vote, then he must meet The President right away to dissolve parliament and form a new government. Even if he wins, he may meet with the President anyway to pave the way for a new election sometime early next year.

As for a new government it could look like this:

We believe that at this stage the only possibility is to form a new unity government headed by a “super-partes” personality, who should be able to give credibility back to Italy and press ahead with reforms. A technical government, headed by Mario Monti, looks the main possibility. Mr Monti would be highly supported by both the main oppositions parties, UdC and PD, and likely by many of Mr. Berlusconi‟s Popolo delle Liberta‟ MPs (who would support him only once the Berlusconi government had collapsed). A technical government headed by Mr Monti and supported by a large majority would be a positive step forward, in our view.


With Italian bond yields surging higher, analysts said Italy is at the brink of being unable to afford to borrow in the public markets.

Less than two weeks after European leaders unveiled an agreement that was designed to bolster confidence in the region, the yield on Italy’s 10-year debt drew close to the 7% mark, a line in the sand of both practical and psychological importance to the market.

Psychologically, 7% has become a beacon due to the fact that Greece, Portugal and Ireland each sought bailouts soon after their debt reached these levels.


It is normal to discuss the sovereign debt problem by focusing on the sustainability of public debt in the peripheral economies. But it can be more informative to view it as a balance of payments problem. Taken together, the four most troubled nations (Italy, Spain, Portugal and Greece) have a combined current account deficit of $183 billion. Most of this deficit is accounted for by the public sector deficits of these countries, since their private sectors are now roughly in financial balance. Offsetting these deficits, Germany has a current account surplus of $182 billion, or about 5 per cent of its GDP.

Viewed in this light, it is clear that there needs to be a capital account transfer each year amounting to about 5 per cent of German GDP from the core to the periphery. Without that, the euro will break up. Until 2008, this transfer happened voluntarily, by private sector flows, mainly in the form of bank purchases of higher yielding sovereign bonds in the peripheries, and to a lesser extent via asset purchases (notably housing in Spain). Since 2008, these private flows have dried up, and in fact reversed, so the public sector has had to step in. It has done so in the form of direct sovereign loans, and more importantly by international transfers which have been heavily disguised within the balance sheet of the ECB. Although disguised, these transfers are very real.

The eurozone’s proposed solution to this problem – budget contraction plus economic reform in the debtor nations, with no change in policy in the creditor nations – is very familiar to students of balance of payments crises in fixed exchange rate systems such as the Gold Standard or the Bretton Woods system in the past. It is not impossible for these solutions to work, but they are very contractionary for economic activity, and very frequently they fail. When they fail, they lead to devaluations by the debtor economies, normally because the required degree of contraction proves politically impossible to undertake. That is where Greece probably finds itself today. Others may be in the same position before too long.

Bloomberg Inc. (PCLN), the biggest U.S. online travel agency by stock market value, forecast fourth- quarter sales that missed analysts’ estimates, citing concern that the debt crisis in Greece will engulf Europe.

Sales will rise 27 percent to 32 percent from a year earlier, the Norwalk, Connecticut-based company said today in a statement. Analysts on average expected an increase of 36 percent to $994.9 million, according to a Bloomberg survey.

Priceline gets more than 60 percent of its revenue from overseas, where concerns about Greece are threatening spending on international travel. Greece’s prime minister, George Papandreou, is trying to work out a deal to maintain outside financing and avert an economic collapse.

The company said “concerns relating to potential sovereign defaults by Greece and other European states, may subject operating results to greater variability in the future.”

Tomorrow’s Tape -WSJ

Economics, FedSpeak and Eurozone Foolishness:

  • At 7:30 a.m. ET the NFIB releases its small-business optimism index for October. This has been a grouchy bunch lately.
  • At 2:00 p.m., Minneapolis Fed President Narayana Kocherlakota does some talking.
  • Throughout the day, we have EU finance ministers talking, a Greek T-bill auction, a vote in Italian parliament and more.