April 30, 2013

It is Bunga Bunga all over again!

With the election confirmed today by the Senate of the new Italian government Berlusconi has managed to place himself in power once again. 
No wonder that Berlusconi is having a very good time these days; with two trials pending and a new government controlled by him, he has managed again to shield himself from going to jail. 
The old fox has outwitted his antagonists once again.

Beyond the politics of the moment Italy though is besieged by a very serious crisis.

As the various central banks dump money into the system, the yields on Italian sovereign debt have gone down but this does not change the economic difficulties.

The official debt to GDP ratio is 136% but the actual number is somewhere around 280% which is unsustainable by any measure.

Italy's Real GDP is back to 1990s levels practically erasing any growth accumulated in the last 10 years.

The Italian banking system is also in dire straits.
Italian banks are seeing a sharp deterioration in the quality of their assets. The rate of acceleration in newly impaired loans is staggering as it appears the current recession, driven by falling internal demand, is more insidious than the export-led crisis in 2009.

And no matter how the Italian banks try to differentiate their bad loan composition, it is an ugly picture.

The Italian House Price Index (IPAB) decreased 4.6% YOY as a result of tightening credit conditions, new property taxes and a difficult macro environment.

Italy's industrial base has one important peculiarity: 95% of companies have under nine employees. In fact the average is four. They are micro companies and as such, their balance sheet is modest and so is their ability to withstand prolonged contraction in demand (external or domestic depending on the line of business).

Italy has a second important peculiarity. It has significant household financial wealth and an aging population, including a high average age of entrepreneurs.
This implies that on the margin more entrepreneurs are likely to decide to scale back operations as expected profitability has diminished due to weak turnover, high red tape and growing fiscal burden.

On the margin, opting for early retirement looks like an increasingly appealing option.
Be it because of severe balance sheet pressures or because of less attractive future returns, the economy is losing productive capacity at a disturbingly high pace.

But despite private wealth and assets the public sector is quite close to going over the cliff.

Italy’s difficult position was enumerated in a Bank of Italy report to parliament last week which said the economy was going through its most acute crisis since World War II. Economic output last year was nearly 7% below that of 2007, while disposable incomes had fallen 9.5%. Industrial production had collapsed by 25% over five years, while the building sector shrank 22%. Unemployment had nearly doubled to 11.7% the Italian central bank said.

In the meanwhile Berlusconi's ratings are at an all time high, his PDL party in the latest polls is showing an increased popularity eroding support at PD and MS5.

Simply wondering if the Italian people are completely deluded or simply insane, I propend for the second option!

“Insanity is doing the same thing, over and over again, but expecting different results.”


No comments: