As Silvio Berlusconi manages to find a way to make an honourable exit as the 61st Italian PM since 1948 all eyes are on Italy today and over this coming weekend.
It’s been clear throughout my lifetime that Italy of all nations in the western developed world has been extremely inconsistent with their definitions of what ‘austerity’ really means. It must be very difficult for any politician in Italy to manage anything as there is a constant fear of antagonism directed from the mafia which (very) effectively controls the highly profitable Italian ‘black’ market. Although things have undoubtedly improved in recent years it’s pretty clear that huge swathes of bureaucracy (see France to show us all how it’s done) and infrastructure anomalies persist.
The Italy bond yields are astounding markets but I suspect that there are bigger shocks to come for all concerned. The extraordinary market reaction to the 7% + yields this week just shows that no-one out there (including just about everyone in capital markets these days) is living in the ‘real world’. As a young man in 1978 I left Chartered Bank (where I worked on Fixed Deposits looking after mainly Arab accounts, Al-Khalifa & such like) and joined the largest firm of money brokers in the world, MW Marshall & Co where I undertook 6 months training as an Inter-Bank dealer which I hated every minute of.
It was interesting times back then though in London as my following job proved (but I’ll come back to that later). My lasting memory of my daily drudge of picking up calls to other bank dealers was that each day at around 2.30-3.00pm the market would inevitably undergo a strange panic as overnight, 1 week, 1 month, 3m, 6m, year, 5 year interest rates would get squeezed. In those days the Bank of England insisted that ALL banks located in London mustbalance their loan books (unlike today where most are open-ended). Just like any casino there were always one or two banks scrambling to borrow at any cost. For months on end it would not be unusual to see overnight rates reach 20-35%….yes 35%.
So let’s look at Italy today. The risks are there for ALL to see. The immediate problems concern around Euros 30-100 billion depending on who one believes but it’s common knowledge that in 2012 there is the matter of the renewal of Euros 300billion+. Debt as a % of GDP is around 120% and interestingly personal debt (households) is ONLY 40% versus a Eurozone average of 75% which suggests that cash is constantly changes hands ‘on the black’.So why should market excited at 7-8% bond yields?
Looking at Greece for a minute the same thing happened. When the wheels finally fell off bond yield went into the stratosphere and the end result has been the appointment of a new PM with a name that sounds alarmingly like an Indian snack and a former Haitian President (anyone for a Papademos?). What’s more alarming though is that Papademos is a former Vice-President of the ECB. Oh dear, and the eurocrats think that markets will be impressed by this (?) do they? I don’t think so but I do wish him well. There is bound to be a few amusing cartoons hereon which should put a smile back on our faces though.
My instinct tells me that Italy bond yields could reach 10%+ within days and then the aprty will really begin. Whoever takes over from Berlusconi should be reminded though that it’s not everyone who has the chance and opportunity to make it SIXTY-SECOND TIME LUCKY (!!) IN 63 YEARS…….
Anyone for a pizza?