Italian Government Bails Out Rome

2014 is turning out to be a very interesting year. Two months into the year, we have seen several bank runs (Thailand, Kazakhstan and Ukraine) and also we saw China’s bailout of a delinquent shadow bank.  

Fresh reports say that cash strapped Rome has been bailed out by financially beleaguered Italian government.

From the South China Morning Post:

Decadent and in decline, its beauty imperilled by physical and moral decay, the Rome portrayed in Paolo Sorrentino’s film La Grande Bellezza could end up giving Italy a yearned-for win at the Oscars on Sunday night. But off-screen and far from the glitz of Hollywood, the financial troubles of the eternal city – and the daily trials of its long-suffering residents – are no cause for celebration.

On Friday, at the end of a week which saw the spectre of bankruptcy loom large over the ancient capital, the Italian federal government said it had approved a last-minute decree that would give an urgently-needed injection of funds to the city, thus staving off imminent disaster.

While not detailing the new plans, cabinet undersecretary Graziano Delrio said the sum to be transferred to the municipality “remains the same”– around 500 million euro (HK$5.3 billion) – as had been envisaged under a previous decree ditched earlier in the week by the government.

Nicknamed “Save Rome”, that decree had become so bogged down in a verbose and venomous parliamentary process that Mateo Rienzi’s new administration withdrew it and said it would find a new way of helping the Rome authorities plug an 816 million euro hole in their budget.

So bailouts of financial boils appear to be a deepening global trend.

Mired in stagnation, it’s a wonder how Italy can afford to conduct such actions

Italy’s debt levels remain one of the highest in the Eurozone (chart from CFR)

And Italy’s economy continues to grapple with record level of unemployment. 

chart from tradingeconomics.com

Reports the Bloomberg:

Italy’s unemployment rate rose to a record high in January, signaling that companies may fail to hire even after the economy returned to growth in the last quarter of 2013.

Unemployment increased to 12.9 percent from 12.7 percent in December, the Rome-based national statistics office Istat said in a preliminary report today. The January rate is the highest since the data series began in the first quarter of 1977. The median estimate of five economists surveyed by Bloomberg called for an unemployment rate of 12.7 percent last month.

Not to worry, the bailout, which will likely be funded by more debt issuance, will benefit from the reemergence of Italy’s convergence trade as bond yields shrink to record lows.

This means zero bound interest rates will accommodate Italy’s spendthrift ways (chart from Danske Bank).

The reason for record low yields? 

Italian banks have been stuffing their balance sheet with sovereign debt…

…as Japanese investors chase yields also by piling into Italian yields, notes the Zero Hedge. Rallying yields have been inspired by ECB’s Mario Draghi pledge to “do whatever it takes” to preserve the Euro

Italian stocks as measured by the FTSEMIB has also been booming.

So in Italy we see a parallel universe, stagnating economy in the face of booming stocks and bond markets. Convergence in interest rates and divergence in economic performance. Wonderful no? 

And Rome’s bailout will add only to Italy’s economic woes via a larger debt burden and a shift of resources to uses of lesser value or more malinvestments.

On the political front, the Italian Prime Minister Enrico Letta recently resigned and has been replaced by Matteo Renzi who at the moment has been working to gather support for a coalition government. As noted by the Economist in 2013, in 67 years the Italian government has had 62 governments due to a highly fragmented political sphere.

So in order to gain broad political support, politicians will have to ensure doleouts to various interest groups, and Rome’s bailout has just been one of them. 

So in spite booming markets, which is a sign of resource redistribution from the economy to the banking and political class, the Italian financial crisis still lingers and may resurface soon. Rome's bailout may have signified the proverbial "shot across the bow" of the periphery spreading to the core dynamic.

The Rome bailout also demonstrates why Eurozone is also a fertile candidate for a global Black Swan event.

Italy’s Regulation Choked Labor Markets

Here is another example of the normative way of how politicians deal with problems: They treat the symptoms rather than the disease.

From the Wall Street Journal,

Prime Minister Mario Monti has issued a new "growth decree" to revive Italy's moribund economy. Among other initiatives, the 185-page plan proposes discount loans for corporate R&D, tax credits for businesses that hire employees with advanced degrees, and reduced headcount at select government ministries.

Will any of this solve Italy's economic problems? Only in the sense that one could theoretically drain Lake Como with a ladle and straw. Allow us, then, to illustrate why Italy's economy stagnates.

Imagine you're an ambitious Italian entrepreneur, trying to make a go of a new business. You know you will have to pay at least two-thirds of your employees' social security costs. You also know you're going to run into problems once you hire your 16th employee, since that will trigger provisions making it either impossible or very expensive to dismiss a staffer.

But there's so much more. Once you hire employee 11, you must submit an annual self-assessment to the national authorities outlining every possible health and safety hazard to which your employees might be subject. These include stress that is work-related or caused by age, gender and racial differences. You must also note all precautionary and individual measures to prevent risks, procedures to carry them out, the names of employees in charge of safety, as well as the physician whose presence is required for the assessment.

Now say you decide to scale up. Beware again: Once you hire your 16th employee, national unions can set up shop. As your company grows, so does the number of required employee representatives, each of whom is entitled to eight hours of paid leave monthly to fulfill union or works-council duties. Management must consult these worker reps on everything from gender equality to the introduction of new technology.

Hire No. 16 also means that your next recruit must qualify as disabled. By the time your firm hires its 51st worker, 7% of the payroll must be handicapped in some way, or else your company owes fees in-kind. During hard times, your company may apply for exemptions from these quotas—though as with everything in Italy, it's a toss-up whether it's worth it after the necessary paperwork.

Once you hire your 101st employee, you must submit a report every two years on the gender dynamics within the company. This must include a tabulation of the men and women employed in each production unit, their functions and level within the company, details of compensation and benefits, and dates and reasons for recruitments, promotions and transfers, as well as the estimated revenue impact.

I earlier posted the labor markets of France and Germany compared to Spain.

Such astounding maze of regulations has been one of the major dynamics for today’s crisis. This has produced a huge bureaucracy that has been draining productive resources from entrepreneurs. This has also increased the costs of doing business. Reduced the incentives of entrepreneurs to expand. Shifted many activities to the informal or shadow economy.

Italy has one of the largest informal economies relative to the OECD nations

As well as encouraged corruption. Italy ranks as one of the most corrupt in Eurozone. Overall, such regulations has reduced Italy’s competitiveness.

So reduced competitiveness leads to diminshed output (income) – ballooning government (expense)= crisis (deficits)

And how does the Italian government intend to fix the problem?

Among other initiatives, the 185-page plan proposes discount loans for corporate R&D, tax credits for businesses that hire employees with advanced degrees, and reduced headcount at select government ministries

Gosh, 185 pages of more regulations and more bureaucracy.

Note: reduced headcount at “select” government ministries looks more symbolical and seems like a loophole.

Yet the mainstream advice of solving this problem by inflation will only worsen the situation, as this does not address the root: asphyxiation from big government.

Doing it over and over again and expecting different results only reinforces the worsening of this crisis.

Italy’s Pro-Growth Tax Increases Backfires

Economic reality flies in the face of the “pro-growth” policies prescribed by politicians and which has been endorsed by mainstream experts.

Italians join Greeks in dodging tax increases, which demonstrates their refusal to feed big government through the strangulation of the private sector.

From Bloomberg,

Italian Prime Minister Mario Monti is facing signs that tax increases are beginning to backfire as his new levy on real estate goes into effect.

Value-added tax receipts have declined since Monti’s predecessor, Silvio Berlusconi, raised the rate by 1 percentage point in September as the economy was slipping into recession,government data released June 5 showed. The amount collected fell in the 12 months ended April 30 to the lowest since 2006.

Finding the right deficit-reduction mix as Monti fights to meet budget targets is critical for Italy to avoid becoming the biggest victim yet of Europe’s financial crisis. A slump that is driving up welfare spending is adding urgency to Monti’s effort to make the economy more competitive amid a growing backlash across Europe against austerity.

“This government has raised taxes too much,” said Alberto Alesina, a professor of political economy at Harvard University. “It would be much, much better to lower spending.”…

The decline in VAT revenue figures may bolster the government’s efforts to postpone a further increase in the rate after October by 2 percentage points to 23 percent. That would put Italy on par with Greece.

The emperor has no clothes. Pretentious knowledge has been exposed via the law of unintended consequences

Again from the same Bloomberg article, (bold emphasis added)

Monti planned to tap more than 4 billion euros of projected savings from a government spending review to put off the VAT increase, which his deputies acknowledge may deepen the recession.

“The economy shows signs of strong deterioration,” Finance Undersecretary Gianfranco Polillo told the Senate in Rome on June 6. “In light of the fall in domestic demand, betting on a further VAT increase would be incomprehensible and even wrong.”…

Under Monti, Italy’s tax burden, the ratio of tax revenue to economic output, will rise to 45.1 percent this year from 42.5 percent in 2011, and won’t start falling until 2015.

Monti, a former university president and Goldman Sachs Group Inc. (GS) adviser, was brought to power in November to rein in bond yields and bring down debt. His 20 billion-euro austerity package raised retirement ages and was followed by measures to ease firing rules and promote competition. Increased rates on gasoline were enacted in December and on luxury goods earlier this year, while the first property tax payments are due next week.

“I don’t want to deny that we could have done more and better,” Monti said in a June 7 speech. Still, his reforms have produced results, he said.

Dodging Tax

The government had 99.8 billion euros in VAT receipts in the 12 months ended April 30 tied to internal trade, or transactions among domestic counterparties. That compares with 100 billion euro in the 12 months ended March 31 and 101.3 billion euros in the period ended April 30, 2011.

“VAT revenue does depend on growth in domestic consumption,” said Ian Roxan, director of the Tax Programme at London School of Economics and Political Science. “It is also not immune to evasion. It is certainly possible that in a time of austerity people become less willing to pay VAT.”

Italy loses more than 120 billion euros in unpaid taxes every year, according to the Equitalia tax-collection agency. The country retrieved 12.7 billion euros from the fight against evasion in 2011, up 15.5 percent from 2010.

This also exposes the propaganda that the public has been “anti-austerity” which is nothing more than media's manipulation of people’s minds. Because if Italians have indeed been anti-austerity, they would have rushed to the tax collection agencies to pay their share. Duh. Or maybe Italians came to realize they are NO free lunches.

The harsh lesson from reality is “If you tax something, you get less of it.”

Italian Government Restricts the Use of Cash

My wretched airport experience last year has a link to what’s going on in Italy.

Basically global governments have used money laundering as an excuse or as a front to compel the public to migrate their transactions into the politically privileged banking system so that these transactions can be monitored and subsequently bankrolled to finance the governments. I think this represents part of the financial repression.

From Bloomberg (hat tip Bob Wenzel) [bold emphasis mine]

Prime Minister Mario Monti, in office just over a month, wants landlords, plumbers, electricians and small businesses to stop conducting large transactions in cash, which critics say helps them evade taxes. The government on Dec. 4 reduced the maximum allowed cash payment to 1,000 euros from 2,500 euros.

“If they force us to use credit cards, prices will go up,” said d’Andrea, noting that many retailers offer discounts to customers who pay in cash and don’t demand a receipt, in effect splitting with them the savings from evading the country’s 21 percent sales tax. She may curtail future purchases if she’s unable to use cash, d’Andrea said.

Italy loses more than 120 billion euros in unpaid taxes every year, according to the Equitalia tax collection agency. The country spends another 10 billion euros annually on security and labor for processing cash transactions, according to banking association ABI.

Debt Crisis

Monti is focusing on curtailing evasion as one way to reduce Italy’s 1.9 trillion-euro debt, which is bigger than Spain, Greece, Ireland and Portugal’s combined. Investor concern that Italy remains at risk of being overwhelmed by the region’s debt crisis pushed the country’s borrowing costs to euro-era records last month.

In Europe, Italy has a large shadow or informal economy (chart from the Economist) which implies that transactions are not being taxed and are usually done on cash basis and outside the banking system, thus the so-called “evasion”.

Yet in reality informal or shadow economies are symptomatic of the markets circumventing burdensome and stifling regulations, tax payments and social welfare contributions as previously discussed.

So essentially debt strapped governments like Italy has launched a war against their informal economy.

Such dynamic can be seen from the succeeding portion of the same article (bold emphasis mine)

The reform pits the government against some Italians who prefer to pay for everything from wedding receptions to home renovations with cash, allowing merchants to underreport or not declare the revenue, and gaining a discount in exchange. Many small companies pay salaries in cash, allowing employees to report less income, the Finance Ministry said last year.

“Businesses make us accomplices, because nobody wants to pay extra on a large transaction,” said Adele Costantini, a professor of medicine in the southern region of Abruzzo, who had to argue to get a receipt from a house painter. “I want them to pay the tax, not unload it on me.”

Italians are the euro region’s least-indebted consumers and among its biggest savers, according to data from the European Union’s statistics office, Eurostat. Their frugality may be at least partly linked to a distrust of paying with anything other than cash. Italian credit-card holders use their cards on average only 26 times per year, or five times less than in the U.K., according to the Bank of Italy.

‘Culture of Cash’

“The culture of cash is strongly ingrained in Italians, even those that don’t evade,” Deputy Finance Minister Vittorio Grilli said at a Dec. 5 press conference in Rome. The government initially wanted to set a 300-euro or 500-euro cash limit but decided against it, Grilli said, reasoning that citizens needed time to adapt to new rules.

These are manifestations of the welfare state-central banking-banking cartel facing continuing tremendous pressures to preserve the current unsustainable system.

Yet impositions like the above which goes against culture will naturally meet stiff resistance. And unintended consequences will likely be the ensuing order—perhaps the informal economy might resort to trading based on foreign cash currencies or local community currencies could emerge (like in some parts of the US) or even trading could be done in metallic coins or that such laws will simply be ignored or not complied with or that corruption will only swell. There are many variations that could arise in response to such repressive law.

Politically Driven Global Stock Markets Slammed Anew

Global stock markets got clobbered anew as Italian bonds breached the 7% threshold level in the face of Italy’s lingering political crisis in trying to resolve the debt issue. This also demonstrates signs of the diffusion of debt crisis in the Eurozone

From the Bloomberg report, (bold highlights added)

Europe’s biggest clearinghouse said that customers must put down bigger deposits to trade Italian bonds as concern rises that the government will struggle to reduce the world’s third- largest debt burden. Italian yields surged as Prime Minister Silvio Berlusconi said he won’t resign until austerity measures are passed, even after he failed to muster an absolute majority on a routine ballot in parliament yesterday.

A senior lawmaker said German Chancellor Angela Merkel’s Christian Democratic Union may adopt a motion at an annual party congress next week to allow euro members to exit the currency area. In Greece, Prime Minister George Papandreou’s drive to put together a unity government fell into disarray as rival parties squabbled over the next premier.

The important twist here is that the formerly rigid stance of the Eurozone on their membership standings seem to have shifted, EU bureaucrats appear to be exploring the option for member exit.

None the less, if the market’s downside volatility has been due to the Eurozone, then it is a curiosity to see US equities falling more than the Euro stocks

(from Bloomberg)

Are the markets suggesting that US stocks, which has outperformed the Euro contemporaries, will be doing a catching up?

Well gold prices despite yesterdays’ steep losses remain on bullish trend which may indicate that the current volatility may be an interim development

As I have been saying expect sharp market volatilities based on the effects of the politicization of the financial markets and from boom bust policies.

The market climate remains very fragile and highly sensitive to the fluid developments in the realm of global politics.

ECB Expands QE: Will Buy Italian and Spanish Bonds

So I am right, the ECB will expand her version of Quantitative Easing (QE) operations

From Bloomberg,

Stocks erased losses after Reuters said the European Central Bank is pressuring Italy to make further reforms in return for buying Italian and Spanish bonds. Italy’s government will announce plans to speed up state-asset sales, liberalize the labor market and introduce a balanced-budget amendment into the country’s constitution, Sky TG24 reported today, citing unidentified officials.

European leaders are hunting for solutions to the debt crisis, helping Italy and Spain gain a respite from the market turbulence after the resumption of the ECB bond-buying program.

The ECB would be willing to buy more bonds of deficit-hit countries once they take “concrete” steps to stabilize their finances, European Central Bank council member Luc Coene said.

Today’s paper money system founded on the welfare based tripartite banking-central bank-government architecture seems bound for disintegration.

War on Credit Rating Agencies: Italy versus S&P and Moody’s

Falling markets? Blame anyone else but the government.

From Reuters,

Italian prosecutors have seized documents at the offices of rating agencies Moody's and Standard & Poor's in a probe over suspected "anomalous" fluctuations in Italian share prices, a prosecutor said on Thursday.

The measure is aimed at "verifying whether these agencies respect regulations as they carry out their work," Carlo Maria Capistro, who heads the prosecutors' office in the southern town of Trani which is leading the probe, told Reuters.

The documents were seized at the Milan offices of the two agencies on Wednesday, he said, adding that prosecutors had also asked Italian market regulator Consob to provide documents relating to their registration in Italy.

S&P in Italy said in a statement it believed the probe was "groundless".

"We strongly defend our work, our reputation and that of our analysts," it said.

Moody's said it "takes its responsibilities surrounding the dissemination of market sensitive information very seriously and is cooperating with the authorities."

The Trani prosecutors have opened two probes -- one for each rating agency -- after a complaint by two consumer groups over the impact of their reports about Italy on Milan stock prices.

The first complaint was filed against Moody's after it published a report in May 2010 about the risk of contagion for Italian banks from the Greek crisis.

A second complaint filed in May this year targeted Standard & Poor's after it threatened to downgrade Italy's credit rating because of its huge public debt.

This isn’t to defend the sullied US credit rating agencies whom failed to predict the last crisis and whose operating process appears to be politically oriented.

The essential point here is that when turmoil emerges, governments always shift the blame elsewhere. In this case, markets are simply reflecting on the real deterioration of the country’s ability to pay creditors as a result of fiscal imprudence.

Desperate governments will resort to almost anything, even to the absurd, in order to control market price signals for them to look ‘good’.

At the end of the day, dealing only with the symptoms are most likely to exacerbate the disease.

Italian Crisis: Banking Cartel Addicted to Bailouts

The Economist proposes that Italy is in a better place than Greece in terms of debt.

According to the Economist

FEARS over the safety of Italy's government debt would take the euro-zone crisis to a new phase: for its members a choice between breaking up the project and sanctioning big transfers from healthy economies to struggling ones; for banks a question of how to manage exposure to the world's third-largest bond market. When Italian spreads over German bunds ballooned at the end of last week and kept moving in the same direction on July 11th and the morning of July 12th, it looked like that moment of panic had arrived. Markets have since calmed down a little and rightly so, according to this chart, which ranks countries by their debt burdens. But until markets get a clear signal from European governments that they are willing to do whatever it takes to stand behind the euro, the gyrations will continue.

I think the issue of the debt crisis represents a camouflage to what is truly at work here.

To me, the Italian (or the Greek) crisis is no more than an extension of saving the scalp of the badly pummeled European Central Bank sponsored banking (cartel) system.

From Bloomberg,

French banks, including BNP Paribas SA and Credit Agricole SA (ACA), have the most at risk from the euro- region’s debt crisis infecting Europe’s largest borrower: Italy.

At the end of 2010, French banks carried $392.6 billion in Italian government and private debt, according to data from Basel, Switzerland-based Bank for International Settlements. That’s the most for financial institutions from any foreign country and more than double held by German lenders.

At the end of the day, the ECB will ride to rescue the cartel, despite the current rhetorical differences, which has reportedly been the kernel of the current financial turmoil at the Eurozone.

That’s what central banks had been established for. And that’s what they’ll do as they have previously done in the US or in Greece.

And the US will likewise participate indirectly via the IMF and or through foreign currency swaps and or via another asset purchasing program (Quantitative Easing) that would possibly channel money through the Eurodollar market to the stricken banking system as with QE 2.0.

And this is why gold has now been trading at $1572+ as of this writing (kitco.com). And this is likely why gold prices seems likely to make another milestone breakout to set a fresh nominal record highs pretty soon.