The Telegraph: Mediobanca: solo una bomba atomica puo’ salvare L’italia

15 settembre Articoli

The OECD has drastically cut its growth forecast for Italy. The depression will drag on though most of 2015.

The economy will contract by 0.4pc this year. It will remain stuck in the doldrums next year with growth of just 0.1pc.

If so, Italy’s public debt will spiral to dangerous levels next year, ever further beyond the point of no return for a country without its own sovereign currency and central bank.

“This is catastrophic for the finances of the country. We’re heading for a debt ratio of 145pc next year,” said Antonio Guglielmi, global strategist for Mediobanca.

“Who knows the maximum number that the market will tolerate? The number is already scary, but for the time being Draghi’s poker game is proving successful, and there is now the smell of QE keep the game going for a bit longer.”

“It is going to take a nuclear bomb to turn this around. If Draghi ends up doing almost nothing – and there is a lot of scepticism about the ECB’s plans – Italy is dead,” he said.

It has been an abominable few days for the Italian economy. ISTAT said today that industrial output fell by 1pc in July (m/m), and 1.8pc from a year ago. It is down a fifth since 2008.

Exports from the regions fell 2.5pc in the second quarter (q/q). The figures for the South were nothing less than catastrophic: Sicilia (-11.1), Sardegna (-11.2), Basilicata (-24.6). It seems that the Mezzogiorno is falling off the bottom of the Italian economy.

The OECD also slashed France’s growth by half a percentage point to 0.4pc this year. It cut Brazil by 1.5pc to 0.3pc. The Brazilian miracle is by now a structural wreck.

Yet it is the eurozone that remains the epicentre of hopelessness. “The recovery in the euro area has remained disappointing, notably in the largest countries: Germany, France and Italy. Confidence is again weakening, and the anaemic state of demand is reflected in the decline in inflation, which is near zero in the zone as a whole and negative in several countries.”

It called for QE, yet again, but such pleas are meaningless without a concrete number.

Italy’s debt reached 135.6pc of GDP in the first quarter, galloping upwards at a rate of 5pc of GDP each year. This is happening despite – or because of – a series of austerity packages, and even though the country is running a large primary budget surplus of 2pc-3pc of GDP. Plans to stabilise the debt have been blown to pieces.

Note that the Monti government said three years ago that the ratio would end 2014 at 115pc. That Panglossian estimate is likely to be wrong by 25 percentage points of GDP. That is a staggering error in such a short space of time. Was it bad luck, or were those crafting policy in denial about the fundamental nature of Italy’s EMU-rooted crisis?

Zolt Darvas from the Bruegel think tank in Brussels said Italy’s nominal GDP is flat or contracting, meaning that it must sustain a rising debt load on a static base. This is a classic debt-compound trap.

“The OECD forecast for Italy is a negative shock. Everything now depends on growth dynamics, and that depends on the ECB. I don’t think the ECB is yet doing enough,” said Mr Darvas.

He said markets are mistaken if they think that the forthcoming blast of ECB lending (TLTROs) will act as super-stimulus merely because it boosts the ECB’s balance sheet (perhaps by €1 trillion over time). “The balance sheet is not a meaningful indicator. It has very few implications for monetary policy. Only purchases of assets will really make a difference,” he said.

Exactly so, and we don’t yet know whether that will be a token gesture – like its earlier purchases of €60bn of covered bonds – or on a relevant scale. The ECB’s Yves Mersch said in a speech last week that this would be nothing like Anglo-Saxon QE, and nor is it intended to be. It is worth reading for a salutary cold douche.

Italy’s rock star leader Matteo Renzi must by now have realised that his first gamble has failed. He thought he could ride a wave of recovery after snatching power in February in a remarkably audacious move in February, only to discover that Europe is not in fact recovering, and that his country is trapped, with no way out under the current deflationary/contractionary policies of the EMU regime.

If Italy slashes wages and deflates the economy further to regain lost competitiveness within EMU, the “denominator effect” will automatically cause the debt ratios to rise. There is no plausible remedy to this unless EMU switches tack to massive reflation, which the ECB is not in fact about to do.

Mr Renzi will soon have to make a second gamble, whether to go along meekly with further austerity and fiscal cuts – chasing his tail in a perpetual vicious circle – and suffer the disastrous fate of French leader Francois Hollande. Or think of a better idea.

I hand it over to Italian readers to suggest which of the two he might choose given his tempestuous character.

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