Berlusconi’s last days

The European sideshow soap opera continued overnight with the two main focal points, Greece and Italy, doing their best to provide some quality entertainment. Greece now seems to be reaching some form a political stability with Papandreou out of the picture and a new unity government forming even though at this point it isn’t too clear who they will be standing behind:

A former deputy head of the European Central Bank emerged on Monday as frontrunner to become Greek prime minister, as party leaders bargained over who will lead a “100 day coalition” to push through a bailout before the nation runs out of money.

Under EU pressure, an unaccustomed spirit of compromise seeped into Greek politics as the top parties haggled over the jobs in a government which will run Greece only until early elections in February.

A source at the opposition conservatives said nothing had been agreed yet with the ruling socialists on who should lead the government of national unity, and refused to comment on speculation that former ECB vice president Lucas Papademos would get the job.

However, the opposition source told Reuters that his New Democracy party accepted that socialist Finance Minister Evangelos Venizelos could stay in his job at a time of national crisis.

It really doesn’t matter who is running the country. The underlying economy is completely broken and until the issue of competitiveness in the Euro is addressed and the existing debt written off to a far more sustainable level there is nothing any Greek politician can do about it. It is yet to be seen whether a parliament made up of various parties can work together, but even if they can their mandate is to continue to enact policy that is killing the economy. The markets may see this as some sort of resolution but in my opinion it changes very little. The following charts demonstrate that Greece continues to in-debt itself to the rest of the world while austerity strangles employment and production:

On a positive note, at least in the short term, Greece seems to have returned to some sort of political stability and is therefore likely to continue to receive external funding. The same obviously can’t be said for Italy:

With Silvio Berlusconi’s fate resting on a group of party rebels threatening to pull the rug from under his government next week, the Italian prime minister is using carrot and stick to try to win over the doubters and pull off yet another parliamentary escape.

Estimates vary widely over how many center-right deputies will jump ship in a crunch vote on public finance in the Chamber of Deputies on Tuesday. Berlusconi’s message to potential “traitors” is clear: you have nowhere else to go and you will be rewarded if you stay.

The 75-year-old media tycoon has defied all calls to step down and is adamant that he can battle on.

“We have checked in the last few hours and the numbers are certain, we still have a majority,” he told party followers on Sunday.

Berlusconi will be able to test that majority on Tuesday when the parliament meets for a vote on the budget. With Italian 10-year bond yields at a 4-year highs of over 6.6% and only staying there, ECB operations in the country appear to be running out of time. The markets obviously perceive Berlusconi as a problem because last night, when there was a rumour that he was resigning, the European markets rose sharply. To add to the politicking Berlusconi was quoted as saying overnight that the IMF inspections of Italy were voluntary and he could stop them whenever he decides to. Obviously this sideshow has longer to run.

Overnight France announced its new austerity budget in an attempt to hold on to its AAA rating with saving of  65 billion euros over 4 years. The main details are as follows:

VAT: France has a discounted sales tax of 5.5% on a range of services and products including water, cattle food, and books. The government plans to raise the discounted VAT rate to 7% from January 2012. Prime Minister Fillon said some “essential products” would be spared the tax hike.

: The French government will speed up its flagship pension reform and raise the minimum retirement age to 62 in 2017, one year ahead of schedule. That measure should save some €4.4 billion between 2012 and 2016, according to French Prime Minister Francois Fillon.

Tax: Fillon wants to save an additional €2.6 billion by cracking down on tax loopholes and various tax relief schemes, known as “niches fiscales” in France. For instance, the government plans to scrap the popular Scellier scheme, which allowed investors in buy-to-let housing to offset part of the acquisition cost against income tax.

Social security cuts: The famed French social security scheme won’t be spared by the latest austerity measures as Francois Fillon announced €700 million cuts in health spending from 2012. The government has decided to index housing and family benefits on the country’s anemic growth rate instead of the projected inflation rate of 2.2% in 2012.

Corporation Tax: The corporate tax rate will be raised by 5% on companies with annual turnover of more than €250 million in what Francois Fillon described as a “temporary” contribution to be imposed on big corporations.

Last but not least: Francois Fillon announced a freeze on salaries paid to French President Nicolas Sarkozy, as well as to all government ministers. However, it is not clear whether that will be enough to make French voters forget that one of Sarkozy’s first moves when he was voted into office was to grant himself a 150% pay rise.

With all this austerity occurring across Europe it shouldn’t be too much of a surprise that the underlying economy continues to struggle. We have already seen this in the PMI, but other data is also starting to show the same trend:

Euro-zone retail sales fell sharply in September and German factory output slumped, raising the likelihood of recession as consumers, businesses and governments retrench at the same time.

Retail sales in the 17-nation currency bloc fell 0.7% in September from August and were down 1.5% on the year, statistics agency Eurostat said Monday. It was the first fall since May.


Germany’s economy ministry reported separately that industrial production in that country, the euro zone’s manufacturing center, fell an adjusted 2.7% in September from August. Production will weaken further in the coming months as fewer orders come in, it said.

The predictions of other future data don’t seem much better either:

European Central Bank Executive Board member Juergen Stark said the euro-area economy may not grow at all in the final three months of the year.

“Possibly we will see, and I say this with all caution, a red zero in the fourth quarter,” Stark said in a speech in Frankfurt today. Growth will be “very weak” going into 2012 and “there are consequences for price and wage developments,” he said.

As I recall, one the primary mechanisms by which recession can be turned around is fiscal stimulus. Everything looks set to worsen for the Eurozone.

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  1. From Merkel’s perspective Berlusconi’s days were numbered from the time his vulgar “una culona inchiavabile” remark was made public. Oh, that and general debauchery, incompetence and questionable dealings.

    • My bet is that 5 years from now we will look back and realise that Berlusconi was the most intelligent and competent leader available to Italy in 2011.

      Once he goes we’ll probably see a new Prime Minister every year (or less), like Argentina in 2001, and each one will appear more foolish and impotent than the last as events render them powerless.

  2. It is good to see the primary beneficiary of the Euro currency Germany starting to be affected as well. I hope the austerity measures they are forcing upon everyone cause their manufacturing levels to fall off a cliff.

    • Yes, they will only accept the reality of the situation and act accordingly when they are forced to. So I also hope things deteriorate beyond the possibility of more can kicking.

      But I’m not too hopeful. It’s only a matter of time before Berlusconi steps down and the remaining EU leaders agree to somehow fund the EFSF. Be it by selling their gold, children’s future… whatever it takes. Markets will soar even if European economic data continues to point to an accelerating recession.

      The past two days have had shocking results with Germany being affected as you say, and the whole EU is contracting now yet the markets ignore these facts and remain happy because of rumors.

  3. Lagarde got herself a new job just in time to avoid being blamed for presiding over French banks gross indebtedness.

    Interesting to see socialists the world over screwing their populations with austerity measures and handing taxpayers cash to their banking masters.

  4. SkoptimistMEMBER

    I still hold out some hope for Europe. Mainly because I think they are the ones most likely to shaft the bankers, rather than their own populace by simply printing money (which I sadly suspect may be what eventually happens anyway).

    I am not sure why there is so much fear about losses. If you make bad investments you should lose money. At the moment everything seems to be geared towards making sure that bad investment decisions are not punished, when the reality is that they should be.

    My optimism stems from the fact that I hope Europe is trying to delay things/buy-time so that the more prudent can make arrangements for the impending correction that are probably going to be closer to a scalping than a haircut.
    Nationalization of the banking sector and a severe restructuring of the financial services sector would seem like a good starting point.

    However, I am sure money printing must be the banks preferred path.

  5. DE, I have two questions..

    (1) How long before Greece needs it’s next bailout?
    (2) Does the money for this coming bailout actually exist or is it supposed to come from the EFSF?
    I’m just not clear as to whether money has been made available for this immediate coming bailout, with all future bailouts after that to be funded by the EFSF or the if the bailout that they will need shortly is meant to be funded by these bond sales.

  6. I Received the following email today:

    The fall-out in Australia of the collapse of U.S. derivatives giant MF Global reveals—yet again—that financial regulator ASIC is not protecting Australian superannuants and “mum & dad” investors, but is setting them up as the fall guys for the big financial speculators’ gambling losses, charged Citizens Electoral Council leader Craig Isherwood today.

    “The government and their regulator ASIC [Australian Securities and Investments Commission] are betraying Australians, not protecting them”, Isherwood emphasised.

    “Derivatives must be banned—it’s the only way to protect the population, and the physical economy which supports that population; instead MF Global has exposed ASIC as being in bed with the derivatives gamblers, allowing them to do things to Australian investors that aren’t even legal in the cesspool of the City of London.

    “MF Global’s 20,700 Australian clients are finding out their money has gone down the toilet, because ASIC’s kinky loopholes allowed MF Global to hedge its own gambling positions with its clients’ money.”

    Isherwood said ASIC’s appalling track record raises serious questions about how it fulfils its responsibilities as a regulator, and about the government’s complicity.

    He cited personal experience with ASIC, when it threatened himself and other directors of the CEC with legal action in 2005, for publishing an edition of the CEC’s New Citizen newspaper that warned Australians that the global derivatives bubble was set to implode.

    “This organisation, ASIC, tried to intimidate the CEC for warning Australians well in advance about the danger of derivatives, and now we see it allows big derivatives gamblers to screw Australians in a way that isn’t legal anywhere else”, he said.

    “This is the same ASIC that vouched for the predators at Storm Financial (a front for Macquarie Bank, the Commonwealth Bank and Bank of Queensland), as they took down the life savings of thousands of Australians through margin lending.”

    He continued, “In early 2009 I called for a thorough-going inquiry into the financial system—an Australian Pecora Commission modelled on the U.S. Senate’s 1932-1934 Pecora Commission which investigated the domination and manipulation of the U.S. economy by the powerhouses of Wall St., typified by City of London favourite J.P. Morgan Jr., including their role in bringing on the Depression. The Pecora Commission laid the indispensable groundwork for Franklin Roosevelt’s New Deal of infrastructure-centred reforms, to restart the economy for the benefit of the people. FDR’s revival and expansion of the physical economy of the U.S., was anchored on the Glass-Steagall Act which separated the speculative activities typical of Wall Street—then and now—from sound commercial banking.

    “Because the government rejected my call in 2009, Australians are still being hit by these disasters today.”

    Isherwood concluded by reiterating the CEC’s longstanding call for derivatives to be banned.

    “MF Global was the fourth largest issuer in Australia of one of the craziest derivatives, CFDs [Contracts for Difference], which were aggressively marketed to foolish everyday Australians as the way to make money in a falling market. MF Global is also up to its neck in looting Australia’s agricultural industries, through derivatives gambling in agricultural commodities markets.

    “Derivatives are a scam, nothing but gambling side-bets, which are used to fleece people and industry. They are the cancer of the global financial system, and Australia is riddled with them,” he said, citing the Australian banks’ collective exposure to about $17 trillion in off-balance sheet derivatives obligations.

    “They must be banned outright, and the accrued obligations must be cancelled under a new Glass-Steagall law”, Isherwood demanded. “Anything less is another government betrayal of the people, but it is up to the people to force the government to take the right action. I urge all who wish to fight for this, to join the CEC.”

    • I don’t claim to know exactly what happened at MF Global, but you mentioned MF Global and derivatives, and the link here claims there were no derivatives that caused the company to fail, but Repo’s.

      “So it seems clear that MF’s European sovereign debt holdings were just that, bond positions financed via repo transactions. Repos, of course, are NOT OTC derivatives. (They’re also not listed derivatives.) They are basic tools of corporate finance commonly used to finance cash bond positions.”