Posted by: Andy Reinhardt on November 9, 2011
The news late on Nov. 8 that Italian Prime Minister Silvio Berlusconi intends to step down after lawmakers vote through a fiscal austerity package this month might have reassured jittery investors looking for signs of progress in solving the euro crisis.
Far from it. European bourses tumbled on Nov. 9—most closing down around 2 percent and Italy’s FTSE MIB closing off 3.8 percent—as the realization sank in that Italy now must find a new political regime stable enough to implement painful cutbacks and tax increases. (The Dow Jones was down 380 points, or more than 3 percent, in mid-afternoon New York time.) The prospect of growing Italian sovereign debt risk prompted London-based clearinghouse LCH Clearnet late on Nov. 8 to raise its margin requirement for trading Italian bonds from 6.65 percent to 11.65 percent. Italian 5-year bond yields soared on Nov. 9 to a euro-era high of more than 7.5 percent, while the spread on 10-year notes vs. German bunds grew to a record 5.75 percentage points.
The problem is that while Berlusconi’s political woes in recent years have been an impediment to reform in Italy, his departure won’t fill the country’s giant debt hole. “For all the embarrassment he has caused his countrymen,” said the InvestmentEurope newsletter from Incisive Media on Nov. 9, “the problem is not necessarily Berlusconi.”
Indeed, according to a Bloomberg News article today about the exposure of French banks to Italian debt,
Italy’s 1.9 trillion euros ($2.6 trillion) of debt is the world’s fourth-largest, behind the U.S., Japan and Germany, and more than that of Greece, Spain, Portugal and Ireland combined. Relative to gross domestic product, it is the highest in Europe after Greece, standing at about 120 percent.
Nor will a caretaker prime minister, likely to be appointed until elections can be held next year, solve any of Italy’s underlying problems. Those issues—an aging population, low economic growth, widespread corruption and tax-avoidance, a north-south divide—will confront any new leader. (Italy has had 62 governments since the end of World War II, and Berlusconi has been the country’s longest-serving leader during that period.)
“People think once Berlusconi resigns, Italy’s problems are solved,” said Senate Finance Committee Chairman Mario Baldassarri, a former Berlusconi political ally who switched to the opposition last year, in a Nov. 9 interview with Bloomberg News. “But even if the cork’s come off the bottle, that’s not champagne that we’ve got to drink: Who’s willing to down it?”
Perhaps not Italians. And likely not the Germans and French, who are already balking at the cost of rescuing far smaller Greece. Italy is the euro zone’s third-largest economy—and it’s definitely too big to fail. Bloomberg View today warns in an editorial that “much as Berlusconi’s exit may please his fellow European leaders, they cannot stand aside as Italy threatens to unravel.” The danger to the entire world economy is so acute that European leaders must stop “dithering,” Bloomberg View says, and redouble their efforts to forge a credible response to the Old World’s financial crisis.
For a nice summary of Italy’s troubles and why they matter, also check out this posting from ThisIsMoney.co.uk.
(Updated to clarify that Italy is the euro zone’s third-largest economy.)