No matter where the financial armageddon starts it will impact
everything. A generation ago it started in Thailand, which
didn’t seem to be a globally important economy, but the
fallout was not pretty. I suppose collapse in Argentina is
normal, and so nobody pays any attention, but supposing the
whole mess starts with the collapse of a major economy.
Italy is in the top ten of world economies. It has stagnated
ever since joining the euro. It’s banking system is on the
rocks, and the budget deficit is not very pretty either. The
actual figures don’t really mean much these days. There are
countries with far worse figures, but Italy has three rather
important symptoms that make it special.
First; the economy in world terms is huge and it is going
nowhere, except marginally down, and is taking jobs with it.
Unemployment in Italy isn’t disastrous, but it is not good,
and prospects are poor, especially among the young. This means
people are not getting more wealthy. They are probably poorer
now than when the country joined the single currency twenty
years ago. Result: unrest.
Second: The banking system is the most unstable of all the
major countries. Several of the main banks are among the
closest to collapse in the world. Not content with this, the
cross-lending within the banking system is such that a
collapse or two will take other non-Italian banks with them.
Personal borrowing is also high. The country is effectively
broke with a non-performing economy. What is worse is that
there is no sign that things could improve within the
perceivable future, and every prospect of them worsening. What
is perceived as the cause of this is that Italy has no control
over her financial instruments. They are bound to the euro,
and the control of the euro is beyond the boundaries of Italy.
They are locked into a one size fits all monetary system which
is controlled from Germany. Germany needs a tighter financial
environment, Italy needs a looser one. The obvious way for
Italy to cope is for them to devalue, something which they are
prevented from doing, and so the scene is set for a bust-up.
Finally, there is the electorate. On the one hand they rather
like the euro. On the other, they are aware that they have no
control over their finances and that is making life very
difficult. There is one other strand to that, and that is,
Italy is the one country in the EU where the North-South
divide is perhaps the most obvious, and that is not lost upon
the part of the political spectrum which calls itself the
Northern League. There were recent ballots which saw the
percentage vote for a different relationship with the rest of
Italy in the high nineties. The north strongly feels that it
is carrying the south, and with economic and industrial
hardship across the whole country, that feeling not only
hurts, it is beginning to fester. And so you have the
environment for some kind of bust-up.
What form does that look like taking?
Difficult to predict the future, as always, but here are a
couple of scenarios. The most obvious is a political blackmail
to Brussels. Loosen the strains on our economy or we’ll leave
the euro. If that should happen, the existence of the euro as
we now know it will no longer be a reality. That’s a tough
piece of blackmail.
Brussels could counter with making things even tougher for
Italy. That seems on the face of it to be a daft move, but it
will impact even worse on the population, who, the idea goes,
will demand another election, and throw out the parties
causing the trouble, and things will go back to the disastrous
normal. That, of course, really solves nothing, and leaves
everybody waiting for the next threat to undermine the whole
house of cards.
Of course, a new election may well produce an even tougher
political resolution to face down Brussels.
(Since matters are moving rather faster than I can publish,
that scenario has actually played out and failed during the
past five or six days.)
The move that is currently in place is a cunning one. It
revolves around the state setting up a second, shadow
currency, and using that currency to issue bonds. The money
gained from selling the new bonds would bail out the
government, but not solve the economic problems. But it gains
time.
Governments are all for kicking cans down the road. They solve
things for themselves, and when the next government comes in,
the problem is shifted to them. That is not the real way to
solve problems.
The interesting question is: what is likely to happen when the
bonds have been sold and the money comes in? I think that is
easy to guess. The bonds will have two years to maturity. That
gives the current government breathing space, but does nothing
to ease the underlying problems. What it does do, is get in
some extra cash which at the time of redemption will be repaid
in the shadow currency, which will no doubt have been devalued
by 60% a couple of months prior to the redemption date.
What happens then? I’m not sure how I see anything beyond that
date. I would have thought at that point the game would be up.
Crash.
If we get to that position, we have Italy in ruins, and a
resurrection of the lira at anything north of a 60%
devaluation to the euro value. That will lead to a run on the
euro, with that currency tanking quite considerably, and
plunging the eurozone into economic chaos. Since the euro is
used for everyday living and international trade for nearly a
third of the planet that spells complete financial mayhem,
with gold at $10,000 an ounce, the introduction of SDRs, and
crypto-currencies going to the moon.
If that scenario does not pan out something else will take its
place to kick the can further down the road and the final
bust-up will be delayed again, but it will have to come sooner
or later because there is no nice way out of this.
Here are some basic facts gleaned from a recent mailout:
Italy has over $2 trillion in debt outstanding...
Unemployment has been stuck above 10% since 2012 and youth
unemployment is above 30%.
Debt to GDP is now at 132%.
Italy spends 10% of its government income on interest
expense and 4% of its entire national GDP.
That’s double the OECD average, and the highest in
Europe over the last 6 years.
The banks are dumping Italian government debt - according to
one firm, banks ditched 12.6 billion euro in December 2017
alone and 40 billion euro in the last three months of 2017.
The Italian banking system had a 16.4% ratio of
non-performing loans in the third quarter of 2016.
Deutsche Bank estimates the non-performing loan problem to
be even larger now, at 349 billion euro
The country owes the rest of Europe 25% of its GDP... enough
that a default would cripple Europe.
Target 2 Balance System. This reveals where money in the
Euro system is moving. It shows when people are abandoning
ship in one nation and fleeing to another – a key sign a
crisis is on the way.
Money on the ground is flooding out of the Southern European
nations and into Germany.
Either borrowing costs will spike, making Italy's debts
unpayable... or the political situation will implode... or
so much money will flood out of the country that the economy
will fall into a depression it'll never escape from.
This is a property blog so let’s draw a couple of provisional
conclusions.
Investing in Italy looks to be pure insanity. Do not under any
circumstances buy real estate in that country. You could well
be buying right before a crash, and a mother of all crashes if
it is allowed to play out. You’d probably lose 60% of your
investment overnight.
I would go even further. Investing anywhere in the euro-zone
could well produce a nasty result in a couple of years time.
There isn’t a realistic way out of this. Money is already
flowing from southern Europe to Germany. That is creating a
further destabilising effect on its own. However you look at
the situation, this is an almighty mess.